By Wiktor Szary and Jason Douglas
LONDON--British consumers are starting to feel the Brexit pinch, data showed Friday, as retail sales dipped in January for the third consecutive month amid warnings that the U.K. economy is set to weaken.
The slowdown in consumer spending, the economy's key driver, comes at an awkward time for Prime Minister Theresa May, who is due to launch divorce proceedings with the European Union by the end of March.
U.K. shoppers initially appeared largely unfazed by the prospect of Britain's exit from the bloc, with sales growing strongly over the summer and hitting a 14-year annual high in October. Their resilience underpinned a robust economic expansion: The U.K. economy grew at the fastest pace in 2016 out of its peers in the Group of Seven advanced economies.
But retail sales contracted in January by 0.3% from the previous month, the Office for National Statistics said Friday, dragging the annual rate of growth down to 1.5%, the weakest expansion in more than three years.
The pound fell on the news, shedding 0.6% against the U.S. dollar and trading at $1.2413. It also fell 0.4% against the euro.
Economists said Friday's data suggest that stirring inflation due to a steep fall in the pound since the June Brexit referendum and meager wage growth are beginning to deter Britons from spending. Average wages after inflation grew by merely 1.4% in the three months to December, the slowest pace of growth in two years.
"This is a micro demonstration of what is likely to be happening to the consumer over the whole of 2017," said Alan Clarke, head of European fixed-income strategy at Scotiabank in London.
It's unclear whether rising prices will dampen enthusiasm among backers of Brexit, which took 52% of the vote. Mrs. May has made clear she intends to pursue a clear break from the EU to get control over immigration--a prospect that has worried investors concerned about trade access to the bloc and its impact on the economy.
Patricia Brown, a 62-year-old retired shoe shop manager from Barking, an east London borough which came out strongly in favor of leaving the EU, said she voted to leave hoping to curb immigration. She has noticed a rise in prices and may have to dip into her savings, but doesn't regret her vote for Brexit, she said.
"There's lots of scaremongering, also about prices," she said. "We managed fine before we joined [the EU], and we'll manage just fine again."
British retailers have warned of tough times ahead. Shares in clothing retailers Next PLC, an industry bellwether, took a beating last month after it warned full-price sales in the year to January 2017 are expected to fall 1% on the year, with pretax profit down 3.6%. The firm warned of a "challenging" 2017.
The January slowdown was driven to a large extent by rising prices for fuel and food, the ONS said. Sterling has lost around 15% against the dollar since the referendum result, a decline that is fueling a surge in inflation: Consumer prices rose 1.8% in January, the fastest rate of growth in 2 1/2 years, and the Bank of England expects annual inflation to overshoot its 2% target within months.
BOE officials led by Gov. Mark Carney have signaled they are prepared to tolerate a bout of inflation to keep the economy on an even keel as Brexit negotiations get under way. Talks are expected to last two years.
U.K. Treasury chief Philip Hammond, who has warned the economy likely faces some turbulence as it exits the EU, is due to present fresh tax and spending plans to Parliament next month.
Saabira Chaudhuri contributed to this article.
Write to Wiktor Szary at Wiktor.Szary@wsj.com and Jason Douglas at firstname.lastname@example.org