Vital store sales are beginning with retailers hoping brisk business will repair damage done by recent freezing temperatures and snow.

Shops are offering bargains galore in the expectation that consumers will take advantage ahead of the looming VAT increase.

However their hopes could be hit as temperatures remain low and a Tube strike will affect travel in the capital.

VAT rises to 20% on January 4 and a new report has warned that consumer spending is expected to drop by 0.5% or £354 million in the first quarter of next year, compared with the same time last year.

Fewer than one in five retailers (18%) plan to pass on the full increase to customers by the end of January, but 95% expect to within three months, the study from price comparison website Kelkoo and the Centre for Retail Research (CRR) found.

The rise from 17.5% will cost the average household almost £520 or £212 for every man, woman and child in the UK and raise £13bn for the Treasury, the report forecasts.

Consumers will reduce their annual spending by £324 per person following the increase, with 50% claiming they will spend less throughout the year, a survey for the study found.

More than a third of consumers (36%) have been buying early to beat the increase and more than half (53%) claim they will reduce their spending by a quarter in January alone, the poll revealed.

Kelkoo marketing director Chris Simpson said: "Retailers are facing a difficult start to 2011 and while it is widely recognised that urgent action is required to plug the hole in the UK's finances, it is imperative to avoid a sharp drop in consumer spending as it could derail the retail industry's fragile recovery from the recession."

It is thought Boxing Day spending online could top £300 mn for the first time.

Comparison website moneysupermarket.com said the UK is set to spend £323m online in a single day - pointing out that the weather and the Tube strike is likely to see shoppers swap the high street for the Internet.