British retailers reported a bigger-than-expected drop in sales in July as heavy rain put off shoppers who are also feeling the hit from high inflation and 14 back-to-back increases in interest rates.

Official data showed sales volumes last month were 1.2% lower than in June. Economists polled by Reuters had forecast a 0.5% drop.

Sterling weakened as investors assessed how much the sales drop represented a warning sign about a slowdown in Britain's sluggish economy, beyond the hit caused by the sixth-wettest July in records dating back to 1836.

"It was a particularly bad month for supermarkets as the summer washout combined with the increased cost of living meant sluggish sales for both clothing and food," Heather Bovill, deputy director for surveys and economic indicators at the Office for National Statistics (ONS), said.

"Department store and household goods sales also dropped significantly."

Many shoppers went online rather than venture out into the rain with 27.4% of retail sales taking place via the internet, up from 26.0% in June and the highest share since February 2022.

Food stores sales volumes fell by a monthly 2.6% while non-food stores sales volumes fell by 1.7%.

The drop followed a strong June for retailers who were boosted by a heat-wave.

As well as the unpredictability of Britain's weather, consumers have been hit by high inflation which stood at almost 7% last month, down from a peak of about 11% last October but still the highest among the world's large rich economies.

However, July's data represented only the second time that sales volumes fell on a month-to-month basis so far in 2023, suggesting resilience in consumer demand.

GROWING DRAG

Some economists said the impact of the steady rise in interest rates by the Bank of England would inevitably hurt consumer spending in the second half of 2023.

"Our view is still that the growing drag on activity from higher interest rates will eventually generate a 0.5% peak to trough fall in real consumer spending," Ruth Gregory, deputy chief UK economist at Capital Economics, said.

Market research firm GfK reported last month that consumer confidence fell in July for the first time since January.

But Samuel Tombs at Pantheon Macroeconomics said the acceleration of wage growth and slowing inflation painted a more upbeat picture.

Data published this week showed basic wages growing at their fastest since records began in 2001, bad news for the BoE which is worried that high inflation will persist but a help for consumers whose earnings are catching up with price growth.

"Looking ahead, we continue to expect households’ real disposable income to rise briskly," Tombs said.

Despite July's rain, Next and Marks & Spencer, two of Britain's biggest retailers, reported strong trading and upgraded their profit outlooks this month.

But the sector has seen losers too. Last week privately owned homewares and household goods discount retailer Wilko collapsed into administration, putting 12,500 jobs at risk.

Retail sales volumes were 3.2% lower than a year earlier, the ONS said, compared with economists' forecasts for a 2.1% decline.

(Additional reporting by James Davey; Editing by Kate Holton and Susan Fenton)