Berlin - German retail sales are set to fall this year as surging inflation hits household spending in Europe's biggest economy, the nation's retail traders' organization (HDE) said Wednesday.

After a disappointing first half of the year, the HDE is not expecting much improvement in the coming months with the group revising down its retail sales projection to a slump in real terms of about 1 per cent as rising inflation eats into consumers' purchasing power.

About three months ago, the organization had predicted a marginal 0.5 per cent increase in retail sales.

The cut in the HDE's retail sales projections is despite the prospects of rising wages in Germany and a trend to lower unemployment.

The release of the HDE's new downbeat forecasts also follows figures published Tuesday showing a bigger-than-expected pickup in retail sales in the nation helped along by higher pay settlements and the improvement in the labour market.

Retail sales rose a real 1.3 per cent in May, the statistics office said, increasing by 0.7 per cent on the year.

But against the backdrop of growing economic uncertainty, the HDE also cut its nominal retail sales forecasts from 2 per cent to 1.5 per cent.

German consumer confidence dropped to a two-year low, the GfK marketing research group said in its latest survey of the nation's households released last month.

"Rising inflation fears, combined with the sustained crisis in the financial markets, a strong euro and a weaker global economy mean that consumers are not very upbeat in their assessments of future economic growth," the Nuremberg-based GfK group said releasing its latest consumer confidence survey.

The GfK said its forward-looking German consumer confidence index slumped to 3.9 points in July from a downwardly revised 4.7 points in June as surging energy and food prices helped to stoke concerns among the nation's households. (dpa)