* Sales index down 0.5 pct from Nov vs +0.8 pct forecast * Inflation erodes purchasing power despite low unemployment * Pão de Açúcar results late Tues to reflect holiday letdown By Brad Haynes and Silvio Cascione SAO PAULO, Feb 19 (Reuters) - Brazilian retail sales fell unexpectedly in December, as rising inflation began to erode the consumer spending that kept Latin America's largest economy out of recession for the past year. Retail sales volumes in Brazil fell 0.5 percent in December from November on a seasonally adjusted basis, the government statistics agency IBGE said on Tuesday. Retail sales had been expected to rise 0.8 percent, according to the median estimate of 27 economists polled by Reuters, all of whom predicted a monthly increase. The weak retail data raises a red flag in an economy that probably grew about 1 percent last year despite a raft of government stimulus. Strong consumer spending has been one of Brazil's few consistent engines for growth as manufacturing stagnates due to weak global demand and soaring labor costs. Falling unemployment and interest rates have unleashed unprecedented demand from Brazil's growing middle class in recent years, encouraged by tax breaks and credit incentives. But inflation finished last year on the upswing and accelerated in January to its fastest pace in eight years, eroding families' purchasing power. Rising prices led to a rare drop in real wages in December, despite record-low unemployment. "Higher inflation should cause a slowdown in retail growth this year," said Luciano Rostagno, chief strategist of Banco WestLB in Brazil. "I think these numbers show the exhaustion of a growth model based on consumption. The government will have to find other ways to stimulate the economy, such as investments." Economists had expected a solid Christmas season to lay the groundwork for a gradual economic recovery in 2013. But initial returns from some retailers have showed disappointing holiday sales, as families struggled with rising debt loads and higher prices for household staples. Supermarket, food, beverage and tobacco purchases, which are especially sensitive to inflation and make up the biggest share of the IBGE retail index, fell 0.3 percent in the month. Sales volumes expanded in just three of eight retail categories. Brazil's biggest retailer, Grupo Pão de Açúcar , said year-end sales at its food and appliance stores open for at least a year rose at the slowest pace since the first quarter of 2009. Pão de Açúcar is set to report full fourth-quarter financial results after markets close on Tuesday. December's retail sales climbed 5.0 percent from a year earlier, the IBGE added, less than the 7.35 percent median estimate in the Reuters poll. Forecasts ranged from a gain of 6.0 percent to 9.6 percent. Sales volumes grew 8.4 percent in 2012 from the year before.