The reduced spending power of UK households has been highlighted after a survey showed sales slowed this month despite widespread discounting.
The balance of retailers who said they sold more goods than a year ago declined to 37% in January from 56% in December as the switch in VAT from 17.5% to 20% this month hit sales, according to the CBI's distributive trades retail survey.
The survey dampened hopes January would see the retail sector bounce back from its worst December performance when snow caused widespread disruption on the high street.
Retailers expect growth to slow further in February, with the balance expecting an increase in sales falling to 25%, as the CBI warned that tough times lie ahead as wages fall further behind price rises.
CBI chief economic adviser Ian McCafferty said: "The lure of seasonal sales and price discounting may have helped mitigate some of the impact of the VAT increase on volumes.
"However, retailers expect the pace of sales growth to slow further next month, and orders placed with suppliers have flattened out."