Retail sales rose on an annual basis in January, but declined compared to December as increased taxes hit consumers.

The volume of sales gained 4.6 per cent last month compared to a year earlier but dipped by 3.8 per cent month on month. On a value basis, sales last month rose by 4 per cent compared to January 2010, but still fell by 1.5 per cent compared to December, when bad weather and lower consumer confidence hit retail sales.

Hard-pressed consumers have seen their take-home pay take a hit in recent weeks as tax changes introduced as part of Budget 2011 have taken effect.

Data was skewed a little by the motor trade, which continued to have a significant impact on the sales figures, as volume in the sector rose 23.9 per cent compared to the same month in 2010.

When the contribution of the motor trade was excluded from the figures, the year on year volume decreased by 1.2 per cent last month, and rose by 2.7 per cent compared to December. Value fell 1 per cent year on year and rose 2.6 per cent on a monthly basis.

Dermot O'Leary, chief economist with Goodbody Stockbrokers, said volatile car sales were confusing, but noted that a 1 per cent year on year fall in core retail sales is "unlikly to be dramatically different to the full-year outturn".

"Partly due to the continuation of the scrappage scheme, car sales had an impressive start to the year," Mr O'Leary said.

"Retail sales can be volatile on a month-to-month basis. While the increase in core sales in January is to be welcomed, we would not expect the annual change for the full-year to be materially different to the performance in January. A visible improvement in labour market conditions in particular would be needed to alter the situation."

Meanwhile, clothing, footwear and textiles rose by 4 per cent compared to 2010.

This was offset by a 9.3 per cent decline in the volume of sales in department stores, a fall of 9.6 per cent in furniture and lighting, and a decrease in books, newspapers and stationery of 4.6per cent.

"The overall trend in retail sales points to muted personal spending outside of the motor industry. The weakness in consumer demand reflects the deteriorating trend in disposable incomes, and it is hard to see much improvement on this front in 2011 especially following the tax increases/social welfare cuts announced in the December Budget. Households have also been hit by rising food and energy prices as a result of the upward surge in global commodity prices, and in some instances by rising mortgage interest rates," said Bloxham's chief economist Alan Mc Quaid.

"Furthermore, the unemployment rate is likely to remain high for some time, weighing negatively on consumer sentiment. The latest official data showed that Ireland's personal savings rate jumped to 12 per cent in 2009 from 4 per cent in 2008, and it is difficult to see the personal sector changing their cautious approach in the short-term even allowing for the 2 percentage point increase in DIRT in Budget 2011."

Ibec's retail sector group Retail Ireland, said the figures indicated a weak start for retailing in 2011, and called on the incoming government to deliver on election commitments to support the sector and cut business costs.

"The Budget hit pay packets in January and this had a major negative impact on spending towards the end of the month especially," said Retail Ireland director Torlach Denihan.

"The key challenge facing the incoming government is to restore consumer confidence and boost spending in the economy. To safeguard jobs in the retail sector urgent reform is needed to reduce key business costs, such as rent, labour costs and commercial rates, and improve access to credit."