German Retail Sales Post Surprise Drop in February

German retail sales fell unexpectedly by 1.6 percent month-on-month in real terms in February, the largest fall in nine months, as inflationary pressures in the food sector discouraged spending.

Preliminary data from Germany's Federal Statistics Office also showed that retail sales fell 0.3 percent on an annual basis, defying expectations for a rise.

Economists in a Reuters poll had forecast that retail sales would rise 0.5 percent month-on-month and by 0.7 percent year-on-year.

Despite a steady two-year improvement in the labor market and robust wage deals secured by German unions in recent months, retail spending in Europe's largest economy has failed to pick up, posting drops in four out of the last five months.

Soaring food and energy costs are largely to blame. Annual inflation in Germany accelerated to 3.2 percent in March.

The figures on Tuesday showed that food, drink and tobacco sales slumped 4.1 percent in real terms in February compared with the prior year.

"The discussion about a loss of purchasing power due to rising prices for food stuffs and fuel is hitting consumer sentiment," said Ulrike Kastens, an economist at Sal. Oppenheim.

Germany's largest retailer Metro, which operates more than 2,200 wholesale stores, hypermarkets, electronics and department stores in more than 30 countries, disappointed investors last month with a plan to revamp its struggling Real hypermarket chain.

The vast majority of Real's 434 stores are in Germany and more than one in 10 of the domestic outlets are underperforming.

Tuesday's retail sales figures excluded sales of vehicles and turnover at gas stations and are based on data from seven German states accounting for roughly 76 percent of total sales volume, the Office said.

The Bundesbank is due to release sales data including vehicles and gas stations shortly.