UK retailers will be hit by a ‘cost tsunami’, think tank warns

The retail sector is facing rising energy costs, higher national insurance as well as the return of full rates to businesses in the coming months. Photo: Mike Kemp/In pictures via Getty Images

The UK retail sector is set to be hit by a ‘cost tsunami’ in the coming months as households face a sharp squeeze in the cost of living amid soaring inflation, rising energy, food and fuel prices.

Retailers could see their costs rise in the second quarter of this year due to the return of full rates for businesses, hikes in utilities and increased national insurance, according to members of KPMG / Ipsos Retail Think Tank (RTT).

The RTT warned that this will put increased pressure on margins and that, coupled with potentially weakened consumer demand, the sector will no longer be able to absorb rising costs.

RTT’s Retail Health Index estimates that the health of the sector will drop by one point in the second quarter of this year despite a better than expected start to the year.

January’s strong growth was mainly driven by non-food categories as consumers restocked their wardrobes for social events and a return to the office.

However, demand from grocers slowed towards the end of the quarter, signaling consumer demand may be down as the cost of living crisis sets in.

He warned that the negative impact, mainly due to costs rather than falling demand, could be more of a blow than a drop mainly due to demand, which is more flexible and can be reversed more quickly.

Read more: Shoppers return to high street despite cost of living squeeze

Analysts said the war in Ukraine and COVID shutdowns in China could lead to further spikes in food prices.

Paul Martin, head of retail at KPMG in the UK, said: “In addition to domestic economic conditions, the conflict in Ukraine and the lockdown in China are expected to drive food prices higher, both through rising fertilizer costs and wholesale food prices, as well as rising prices for some metals and other raw materials and ongoing supply chain issues.

“While pent-up demand and household savings mean we don’t expect a full decline in consumer spending, there will be stiff competition from hospitality and leisure as the weather improves, which will result in the diversion of additional spending from the retail sector.”

Read more: UK businesses most worried about rising energy prices and inflation

Despite this, consumer confidence is not expected to drop significantly over the next few months as some have opted to use savings accumulated during lockdown or buy now and pay off debt later to fuel continued demand.

“In the months ahead, some of the pressure on real household incomes will be eased by rising employment and incomes,” said Ruth Gregory, senior UK economist at Capital Economics. “And while excess savings are skewed towards the upper end of the income distribution, consumers may still be able to increase their spending a bit by reducing their stocks of excess savings built up during the pandemic and/or by borrowing more to continue their purchases.”

Watch: The risks of buying now and paying later

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