The consumer has gone on "strike" and the high street is suffering badly.
Sales failed to bounce back last month as supermarkets suffered a sharp reversal of fortunes.
National Statistics said retail sales were flat in August after a pick-up in spending on general merchandise was offset by disappointing trading at food stores.
Economists said the figures were below expectations of a 0.2 per cent monthly rise and would increase calls for the Bank of England to cut interest rates further.
Pundits are divided on whether the BoE will listen.
Heavyweights Next and Kingfisher underlined how much the sector is suffering by unveiling falls in half-year sales.
Clothing retailer Next told investors it believed a significant improvement in conditions for the second half of this year was "unlikely".
Yesterday's data from the NS showed that food sales dropped 1.2 per cent in August - the biggest fall for more than two years.
But there was better news for retailers of clothing, footwear and household goods who shifted more goods last month as non-food sales picked up 0.8 per cent.
Standard Chartered economist Gavin Redknap said the overall tone of the report was " undeniably gloomy" and noted that the NS had changed its earlier estimate for July of a 0.3 per cent sales fall to a bigger decline of
0.6 per cent.
He said: "This will be souring news for the Bank of England, which is counting on a pick-up in consumer activity to help drive growth higher in the months ahead.
"While the consumer slowdown hasn't turned into outright consumer recession, its becoming obvious that a static housing market and creeping unemployment is doing enough to keep households' money at home. Rising inflationary pressures should keep the Bank from easing anytime soon, but substantial rate cuts look likely to us in 2006."
David Jew, Midlands director, Barclays Business Banking said: " Although retailers will welcome the slight uplift in the month-on-month figures, underlying conditions remain a challenge."