UK retail consumer trends

In September last year, optimism was growing in the financial markets. The Consumer Price Index (CPI) dropped sharply to 1.7%, down from 2.3% in August, a larger fall than anticipated and the first time headline inflation had dropped below the Bank of England’s (BoE) 2% target since April 2021.

However, since early autumn last year, we have seen a reversion in this trend. In October, the headline rate of UK inflation came in higher than expected at 2.3%, according to figures released by the Office for National Statistics (ONS). This was above the 2.2% rate consensus forecast and took CPI back above the official BoE target, where it has remained ever since.

This reading indicated a significant increase, with higher gas and electricity prices seen as the main contributor by the ONS, coming after Ofgem lifted its energy price cap on 1 October by c.10% for the majority of UK households. Although a higher-than-anticipated increase, it is fair to say an increase was always expected as the UK approached the winter months. Indeed, CPI reached 3.0% in January, its highest recording since March last year.

Nevertheless, longer-term disinflationary trends do remain intact when you consider, at its peak, CPI reached 11.1% back in October 2022. It is this downward trajectory that encouraged the BoE to further cut interest rates to 4.75% from 5% in November, and why such a move had been widely expected amongst economists.

However, at the point of this reduction, the BoE warned any further interest rate cuts were likely to be gradual. Chancellor Rachel Reeves’ October Budget set out measures to increase government borrowing, raise the national living wage as well as elevate employer National Insurance contributions – a move that could trigger further inflation fluctuations since taking effect in April, depending on how much of these costs are passed on to the consumer.

February this year saw a further drop in interest rates; the BoE reduced the base rate by 25 bps to 4.5%, the third time the base rate has been cut since its peak in August 2024. The decision came as prospects for economic growth weakened, with some Monetary Policy Committee (MPC) members worrying that a higher policy rate would be overly restrictive. The rationale was that the cut would lead to banks lowering their fixed mortgage rates accordingly, with cheaper mortgages having the potential to boost housing market activity and wider consumer spending.

The latest cut will, of course, do no harm to the chance of continued improvements in inflation. Most recently, February saw inflation begin to fall for the first time since last summer to 2.8%, whilst CPI rose by 2.6% in the 12 months to March, continuing the downward trend as petrol and energy prices improved.

What is perhaps more comforting is the UK core inflation rate also followed a similar trajectory. In February, it dropped to 3.5%, compared to 3.7% the previous month and 4.5% in the same month last year. Core inflation doesn’t include food or energy prices because they tend to be very volatile, so can be a better indication of longer-term trends, suggesting further improvements are on the horizon.

Furthermore, average wages have continued to outpace inflation, with pay increasing for both public and private sector workers. Pay, after taking into account the pace of price rises, rose 3.4% between October and December compared with the same period a year ago, according to the ONS. The result is more disposable income in some consumers’ pockets, a welcome step forward for the UK retail and leisure market.

However, we shouldn’t pop the champagne just yet. These figures followed warnings from businesses that they were planning to cut workforces and raise prices ahead of the higher employment costs set to start in April this year. Employers’ concerns that paying more in National Insurance, along with minimum wages rising and business rates relief being reduced, have not gone away and are likely to hit pay rises going forward.

Moreover, in the latest escalation of the global trade war, the focus turns to whether the introduction of import taxes on goods coming into America at the start of April will throw a spanner in the works and scupper the UK’s gradually improving economic outlook.

To tariff or not to tariff? That is the question.

After weeks of speculation, on 2 April, the White House announced significant changes to US trade policy, including broad-based tariffs on imported goods. US President Donald Trump’s ‘Liberation Day’ tariffs were at the more severe end of expectations. The starting point was a 10% universal import tariff, applied to all trading partners, irrespective of whether they operate a deficit or surplus in goods trade with the US. On top of this, ‘reciprocal’ tariffs were applied to selected economies.

These ‘reciprocal’ tariffs are not actually reciprocal, however, in that they do not mirror existing bilateral trade barriers but are instead calculated based on the size of the underlying trade deficit. As a consequence, many emerging economies in Asia, which export cheap manufactured goods to the US but import very little in return, are the hardest hit.

However, only a week after the announcement, we have seen a de-escalation of sorts. On 11 April, all tariffs (excluding China) have been put on a 90-day pause, instead authorising a universal “lowered reciprocal tariff of 10%” as negotiations continue.

Despite this, and at the same time, the US government increased tariffs on goods from China to 125%, with a deepening tit-for-tat exchange ongoing between the two nations following China’s earlier retaliation – suggesting it would impose tariffs of 84% on US imports.

Arguably, it was the bond market and a sell-off in US Treasuries that seem to have been the ultimate trigger to this (temporary) turnaround – usually a safe haven in times of economic stress in that they are uncorrelated with risk assets, highly liquid, and backed by the US Government.

How will US policy on tariffs impact the UK consumer?

The UK has appeared to have come off lightly compared to other economies but has still been hit with the blanket 10% tariff on nearly all of its goods being brought into the US, and, as a result, much uncertainty remains over the potential impact on British consumers.

Currently, with the flow of news and the speed of policy changes, any assessment on potential consumer impact must be caveated with a date and time of recording. However, there are a number of significant potential impacts.

Firstly, interest rates and mortgage rates may fall further. Until very recently, Oxford Economics predicted three further cuts to the base rate in 2025, whilst some economists and financial markets had predicted that the BoE would cut them twice this year to c.4%. However, those forecasts have changed, with the BoE now expected to make four 0.25 percentage point cuts by this time next year, taking borrowing costs to around 3.5%.

The Bank is indeed facing a balancing act. On the one hand, its core remit is to keep the inflation rate at 2%; however, the recent tariffs could increase prices and fuel inflation as those costs are passed on to the consumer, which means interest rates could stay higher for longer.

Conversely, if business confidence is negatively impacted by the uncertainty surrounding the tariffs, resulting in a steep fall in orders, the Bank might feel compelled to act to boost sentiment, which is why we might see steeper rate cuts than initially expected. Central banks cut interest rates in response to concerns of an economic downturn in the hope that cheaper borrowing will encourage more spending.

In fact, even before an additional interest cut has materialised, a growing number of UK lenders are cutting mortgage rates. According to the financial data company Moneyfacts, the average two-year fixed mortgage rate ticked down to 5.3%. The average five-year fix edged lower to 5.15%.

Coventry Building Society and Barclays became the largest mortgage providers to offer mortgages at below 4%. Coventry Building Society trimmed its two-year fixed-rate mortgages to below 4%, whilst Barclays is reducing the rate on certain fixed-term deals to 3.99%, joining a number of lenders who made similar moves.

Other lenders are expected to follow, with brokers expecting further falls on the horizon as the big six lenders – Halifax, Nationwide, HSBC, Santander, Lloyds, and Natwest – continue to adopt a wait-and-see approach.

A second impact of the proposed tariffs may well be the variation in the price of everyday goods. Tariffs will be paid for by the businesses that import goods into the US, so the initial impact of price rises will be on US consumers, as businesses that import goods into America are likely to pass on the extra costs to their customers.

However, consumers in the UK could subsequently be affected by the measures if, for example, the value of the dollar strengthens as some economists have predicted, meaning import costs could rise for UK firms importing goods. This creates a potential snowball effect. Higher prices in the UK could indeed prompt employees to demand higher wages, which would further raise costs for businesses.

Contrariwise, some economists have suggested prices could also initially fall as businesses that usually send their goods to the US may instead send them to countries, such as the UK, which don’t have such steep tariffs, potentially leading to a flood of cheaper goods in the UK. British retailers are already expressing concerns about a possible influx of Chinese products onto UK and European online marketplaces, including Shein and Amazon, in an attempt to ‘dump’ excess goods originally intended for the US market.

Another consequence may include a dwindling demand for UK products from the US due to the extra charges importers face. This could hit company profits and ultimately lead to job cuts unless British firms find new customers outside the American market.

Despite long-term improvements, consumer confidence continues to fluctuate month on month as economic uncertainty prevails

Retailers warning of higher prices, exporters warning of cancelled orders, and businesses warning of job cuts will undoubtedly negatively impact consumer sentiment and potentially lead to a tightening of purse strings for many UK consumers. At best, consumer confidence is likely to fluctuate as the BoE tinkers with interest rates in an attempt to counter any economic downturn and encourage more spending.

However, an uncertain economy and subsequent unstable consumer confidence is nothing new; it remains inconsistent on a month-on-month basis. Apprehension surrounding the impact the new government’s first Budget would have on consumer finances back in September last year seemed relatively short-lived, with the months following seeing improvements in consumer optimism. The GfK’s overall consumer confidence index fell to -17.0 in December from -21.0 in October. However, the index subsequently worsened to -22.0 for January before improving again in February (-20.0) and March (-19.0), highlighting the unstable nature of the UK consumer’s attitude toward the current economy; April’s recording will undoubtedly see the index swing back to negative growth following the uncertainty the US tariffs have placed on the global economy.

That said, on a rolling 12-month basis (designed to smooth out the seasonal fluctuations and observe the overall trend in your data), consumer confidence has greatly improved versus the same period last year. The yellow line in Figure 1 tracks its gradual improvement since the cost of living crisis, with the index for March at -17.8, well above the long-term average of -24.5.

Perhaps even more importantly, consumer perception of their own personal financial situation over the next 12 months remains in positive territory (+1.5) for March when again we look at the figures on a rolling 12-month basis. This suggests that, overall, the consumer is slightly more optimistic than pessimistic about their future finances than was the case this time last year when the index stood at -3.8. Whether this positivity remains to be seen with how the impacts of the tariffs play out, but perhaps more importantly for UK retail warehousing is how much of operators increasing costs will be passed on to the consumer. The impact will likely see consumer confidence levels fall further; however, essential and value-based retail, particularly pertinent to out-of-town markets, are well placed to benefit from a scenario where consumer spend tightens.

_{Read the articles within Spotlight: UK Retail Warehousing below.}