UK retailers face spending squeeze as energy costs lift inflation outlook
British households are coming under renewed financial strain as higher energy costs threaten to push inflation back up later this year. Economists now expect inflation to reach 3.6% in the final quarter, adding to concerns over consumer spending and the pace of the UK economic slowdown.
Highlights
- UK inflation eased to 2.8% in April, but economists warn rising energy costs and Iran conflict risks could push inflation higher later this year.
- British Retail Consortium reports shop price inflation up 1.2% year on year in May, driven by higher raw material and shipping costs.
- Kingfisher's UK like-for-like sales fell 4.1% in Q1, shares in Tesco and Marks and Spencer declined, reflecting weak consumer demand amid slowing nominal wage growth to 3.4%.
Inflation outlook darkens for households
As reported by Financial Times, economists following the latest data say rising energy costs are continuing to squeeze household budgets, even after inflation eases to 2.8% in April. Expectations are growing that disruption linked to the Iran conflict will lift pressure on energy supplies and drive a renewed increase in prices later in the year.Data released by the British Retail Consortium shows shop price inflation rising to 1.2% year on year in May, underlining the persistence of cost pressures for consumers. Helen Dickinson, chief executive of the BRC, says the increase reflects higher raw material and shipping costs.
Nominal wage growth has also slowed, falling from 5.5% in early 2025 to 3.4% recently. That weaker income growth is adding to a difficult backdrop for households as living costs remain elevated.
Retail and wider economy show signs of strain
The pressure on household finances is already feeding through to retailers, with shares in companies including Tesco and Marks and Spencer declining as investors assess the risk to consumer demand. Kingfisher, the owner of B&Q, says it is seeing slower sales in a soft market, with UK first-quarter like-for-like sales down 4.1%.Chancellor Rachel Reeves has announced temporary support measures, including a delay to fuel duty increases and VAT cuts for selected sectors, but analysts suggest the impact may be limited against broader cost-of-living pressures. Kallum Pickering, chief economist at Peel Hunt, says consumer confidence remains weak, pointing to a bleak outlook for spending, especially on larger purchases.
Our earlier coverage of U.S.–Iran ceasefire talks focused on a proposed 60-day extension that could reopen the Strait of Hormuz and temporarily remove shipping fees, easing pressure on global energy markets. We noted that the framework was a short-term stopgap, with major nuclear and regional security issues still unresolved, leaving the risk of renewed disruption to oil and shipping routes.
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