U.K. retail sales yet again surprised on the upside, rising 0.7% m/m in January while the strong December reading was revised up to 1.7% m/m from 1.6% previously. This was well above our survey median for a 0.2% m/m drop and also stronger than our own above-median estimate for a 0.3% m/m increase. The ONS said that the January monthly increase was mainly driven by clothing and footwear sales, which rose 6.1% m/m, the strongest month reading since May last year. The sales deflator recorded a 1.0% y/y drop, indicating far smaller discounts than in December when the deflator fell 2.8% y/y on the back of the VAT rate cut and significant pre-Christmas reductions. If excluding the December reading, however, it was the sharpest negative deflator reading since March last year, highlighting that retail sales are currently underpinned by significant discounts, as retailers squeeze credit margins to meet weakening demand from cash-strapped customers.
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