By Philip Waller

LONDON--U.K. retail sales are set to flatline in 2017 because of uncertainty caused by Britain's June vote to leave the European Union, according to a study released Thursday.

Growth in the sector is likely to stagnate during the year as consumers sit on their hands because of a lack of clarity over the U.K.'s future relationship with the EU, the report from the KPMG-Ipsos Retail Think Tank, or RTT, showed.

Overall retail growth is likely to remain around 0.5% as lower one-off spending offsets any rise in spending on essential goods such as food and groceries, it said.

Meanwhile, the weak pound and resulting increases in import costs mean retail prices are likely to rise by between 5% and 8%on average during the year.

U.K. consumer price inflation is set to rise to 2.5%-3% next year, the report said, compared with 1.2% in the year to November 2016, the latest figure available.

Members of the KPMG-Ipsos RTT said the full potential economic impact of the U.K.'s vote to leave the EU likely still is to make itself felt because the U.K. government hasn't yet filed its formal notification to leave the bloc, known as Article 50, with Brussels.

They said businesses are likely to reduce recruitment and investment sharply in the next 12 months, which may weaken consumer confidence.

RTT member and Senior U.K. Economist at investment bank ING, James Knightley, said: "The strength of the economy following the 'Brexit' referendum has surprised many, but we must remember Art. 50 is still to be triggered."

Another RTT member, Maureen Hinton at research group Verdict Retail, said price inflation, rather than higher consumer demand, is likely to increase retail spending in 2017 versus 2016, with shoppers bearing the brunt of higher prices.

"The higher price of imported goods following the E.U. referendum, and the fall in the U.K. pound, has been masked by currency hedging in 2016," she said.

"But this starts to unravel in [the second quarter of] 2017 and all retailers, struggling with cost inflation and squeezed margins, will be forced into passing on price rises to the consumer."

-- Write to Philip Waller at philip.waller@wsj.com

(END) Dow Jones Newswires

December 29, 2016 09:24 ET (14:24 GMT)

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