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UK retailers to be hit by 'tsunami of costs', think tank warns

The retail sector is facing suring energy costs, national insurance hike as well as the return of full business rates in the next few months. Photo: Mike Kemp/In Pictures via Getty Images

Britain's retail sector is expected to be hit by a "tsunami of costs" in the coming months as households face a sharp cost of living squeeze 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 business rates, utility hikes and national insurance increase, according to KPMG/Ipsos Retail Think Tank (RTT) members.

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

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

The strong growth in January was mostly driven by non-food categories as consumers replenished wardrobes for social events and a return to the office.

However, demand at grocers slowed towards the end of the quarter, signalling consumer demand could be on the slide as the cost of living crisis takes hold.

It warned the negative impact, driven primarily by cost rather than falling demand, could be more of a permanent blow than a mostly demand-driven fall, which is more flexible and can be reversed quicker.

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

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

Paul Martin, head of retail at KPMG in the UK, said: "In addition to the domestic economic conditions, the conflict in Ukraine and lockdown in China is expected to lead to rising food prices, both through higher fertiliser costs and wholesale food prices, as well as increased prices of some metals and other commodities and continued supply chain issues.

"Whilst pent up demand and household savings mean that we do not expect consumer spending to fall back completely, there will be strong competition from hospitality and leisure as the weather improves, which will result in further spend being diverted from the retail sector."

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

Despite this, consumer confidence is not expected to decline considerably in the coming months, as some chose to use savings amassed during lockdown or buy now pay later debt to fuel continued demand.

"In the months ahead, some of the squeeze on households’ real incomes will be dulled by employment and earnings rising further," 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 raise their spending a bit by reducing their stocks of excess savings built up during the pandemic and/or borrowing more to continue shopping."

Watch: The risks of buying now and paying later