The Government hopes the increase, which came into effect at midnight (4 January), will help reduce the deficit.
There are concerns, however, that the additional cost to consumers will have a negative impact on the retail sector.
A study by the Centre for Retail Research and Kelkoo forecasts consumers will spend an average of £324 less in 2011 because of the VAT increase.
The research found that January sales will help boost spending by 1.6% this month before the effect of the increase is felt. Total sales are forecast to fall by £2.2bn in the first three months of the year, the report shows.
Research from price comparison site Gocompare.com found seven out of 10 shoppers will think twice about making big ticket purchases in 2011 amid concerns that the VAT increase, public sector cuts and price increases will hit household budgets.
Brands are expected to launch price-based marketing activity to encourage shoppers to spend.
Birds Eye has today (4 January) launched a half price promotion “to help consumers on a tight budget”.