By David Milliken and William Schomberg
LONDON (Reuters) - British shoppers spent more than expected in July, after hot weather and the World Cup continued to boost food sales and other retailers offered discounts, pointing to a solid start to the third quarter for the economy.
Retail sales volumes rose by 0.7 percent, and were 3.5 percent higher than a year earlier, above economists' average forecasts in a Reuters poll for a 0.2 percent monthly rise and a 3.0 percent annual gain.
This compares with sales growth a year earlier of just 1.1 percent though is below rates seen in 2015 and 2016.
Sterling, which has fallen sharply over the past couple of weeks due to fears that Britain could leave the European Union in March next year without any transitional deal, rallied a bit against the U.S. dollar after the data.
"Retail sales posted a robust increase in July, suggesting that some recovery in consumer spending is in the pipeline," Andrew Wishart of Capital Economics said.
Looking at the three months to July as a whole, which smoothes out some monthly volatility, retail sales grew by 2.1 percent versus the previous three months, the biggest expansion since February 2015.
Excluding fuel purchases -- which were dented by higher oil prices -- sales growth over the three months was the fastest since March 2004.
The sales growth comes despite tricky trading conditions for many high-street retailers, which saw department store chain House of Fraser seek creditor protection last week.
High inflation and lacklustre pay increases have weakened household spending power for more than a year. Pay growth shows limited signs of strengthening as Britain prepares to leave the European Union in March next year.
Capital Economics' Wishart said he expected only a slight improvement in consumer spending during the third quarter of 2018 due to weakness in wages.
Britain's economy recorded solid but unspectacular growth in the second quarter of 2018 after unusually heavy snow weakened demand in the first three months of the year, and earlier this month the Bank of England raised interest rates for only the second time in more than a decade.
June and July were unusually warm, and previous surveys of consumer spending have shown that the soccer World Cup encouraged some Britons to spend in pubs and bars rather than in high street shops.
"Many consumers stayed away from some high street stores in July, but online sales were very strong, supported by several retailers launching promotions," ONS statistician Rhian Murphy said. "Food sales remained robust as people continued to enjoy the World Cup and the sunshine."
Clothing sales recorded their strongest year-on-year growth since December, also helped by sales promotions, the ONS said.
Major clothing retailer Next (L:NXT) got a boost from Britain's hot summer with a 2.8 percent rise in second-quarter sales but the fashion retailer does not see the warm glow lasting, sticking to forecasts that indicate little growth for the rest of the year.