Shop price inflation dips to 1.4% as UK retailers seek budget rate relief

As the BRC metric is a specific, backward-looking measure, market participants are projected to dismiss the slight fall in retail prices and rather watch the headline inflation rate, which is predicted to break past 4% next year. Energy represents the pivotal variable: oil and gas values connected to the Iran situation flow straight into both retailer expenses and the inflation projection, meaning that diplomatic developments can rapidly shift expectations for UK interest rates and the pound. A budget that provides business rate relief would aid retailers, but it cannot solve the more extensive cost challenge linked to energy.

The pace of shop price inflation slowed once more in September, though retailers state they are nearing the limit of what they can handle, with conflict-related costs escalating ahead of the budget.

Summary:

• The annual rate of UK shop price inflation declined to 1.4% in September from 1.5% in August, marginally above the 1.3% three-month mean, as reported by the British Retail Consortium.
• Food inflation dropped to 2.5% from 2.8%, with promotional offers cutting meat and dairy costs, though weak European harvests increased fruit prices and robust commodity rates kept chocolate and confectionery high.
• Non-food price inflation fell to 0.8% from 0.9%, driven by strong discounting that lowered costs for back-to-school supplies.
• The BRC's chief executive indicated that retailers have handled a series of cost increases, pointing to business rates climbing in April, alongside rising employment expenses, energy bills, and packaging taxes.
• The BRC wants finance minister John Healey to offer business rate support in his October 28 budget.
• Broader UK official inflation hit 3.1% in August and is forecast to go above 4% in early 2027, driven by the Iran war's energy price shock.

A small fall in UK shop price inflation was recorded in September. The BRC cautioned that companies have little remaining capacity to take on the added costs generated by the Iran war. The group's survey indicated that the yearly rate of shop price inflation declined to 1.4% from 1.5% in August, although the figure is slightly above the three-month mean of 1.3%.

Food pricing was the main driver of the trend. Grocery inflation declined to 2.5% from 2.8%, supported by promotional pricing that brought down meat and dairy costs. This benefit was partially balanced by weak crop harvests in Europe, which increased fruit costs, and strong commodity prices maintained the high cost of chocolate and sweets. Non-food inflation also eased, moving to 0.8% from 0.9%, as significant markdowns cut the price of school-related necessities. Data for the survey was gathered from September 1st to 7th.

Helen Dickinson, chief executive at the BRC, stated that while retailers have taken on a wave of additional expenses, there is a boundary to what firms can manage. She highlighted the upcoming business rate rise in April, alongside climbing employment costs, larger energy bills, and packaging taxes, calling the forthcoming budget an essential moment for the industry. The BRC is calling on finance minister John Healey to employ his October 28 fiscal plan to assist retailers with their business rate obligations, maintaining that this action would aid in restraining prices.

This milder data on shop prices stands in contrast with the larger inflation landscape. The UK's overall official CPI reached 3.1% in August and is expected to climb above 4% in early 2027, driven by the energy price disturbance associated with the Iran war. This disparity indicates that the cost burdens the retailers describe have not entirely flowed through to shelf prices, even if sales and markdowns are currently containing the retail index.

The spotlight now shifts to the upcoming official inflation statistics, to whether energy expenses will continue to climb as the Iran conflict persists, and to what the October 28 budget will provide for retailers concerning business rates.