UK Retailers Warn Two Years of Accumulated Costs Are Set to Feed Through to Prices

Key Facts

Helen Dickinson, chief executive of the British Retail Consortium, warned that stores are beginning to struggle to absorb the wave of costs they have borne over the past two years. She said, "The dam is beginning to break under the wave of significant costs that stores have absorbed over the past two years." The warning comes as Britain awaits the budget scheduled for 28 October, amid pressure on prices and consumer spending. That puts retailers' cost burden at the heart of the debate over the pass-through of costs to consumers. The chancellor is due to present the budget to parliament.

Data from the Office for National Statistics show that annual consumer price inflation reached 3.5% in September, up from 3.1% in August. The index covers a broader basket of prices than those in stores, so it does not measure price movements for goods sold by retailers alone. Transport, particularly fuel, was the largest upward contributor to the change in annual inflation between the two months. Motor fuel prices rose 29.8% year on year in September. These figures provide a broader backdrop to retailers' warning about the difficulty of absorbing costs.

On the demand side, retail sales volumes rose 0.7% in the third quarter compared with the second quarter, despite falling 0.4% in September alone. The two figures show quarterly growth alongside a monthly decline in total volumes. Non-food store sales volumes also fell 0.4% month on month in September. Online clothing retailers said the launch of autumn and winter collections that month did not perform well because of unusually warm weather. The data provide context for conditions in stores, while leaving third-quarter sales above the previous quarter.

The Bank of England held its interest rate at 3.75% in September, by a majority of 6 votes to 3. The three dissenting members voted to raise the rate, while the bank set 5 November for its next decision. In its forecasts published in September, the bank said inflation was likely to rise over the coming quarters. Based on energy prices recorded up to the close of trading on 14 September, it projected inflation at about 3¾% in the fourth quarter of 2026. In a separate survey of market participants, the median forecast for annual inflation at the end of the fourth quarter was 3.3%.

The budget is due on 28 October, ahead of the Bank of England meeting scheduled for 5 November. The bank's survey of market participants' expectations shows a median estimate of annual inflation at the end of the fourth quarter of 3.3%, compared with the bank's projection that it would reach about 3¾% over the same period. Retail sales figures indicate that volumes rose in the third quarter, while declining in September. These indicators remain part of the backdrop to the debate over prices and demand ahead of the two dates. Attention will turn after the budget to the bank's decision and later economic data.