The British retail sector continues to grapple with a protracted downturn, extending its period of declining sales into a tenth consecutive month in July. While the pace of the fall showed a slight moderation compared to June, the latest survey from the Confederation of British Industry (CBI) paints a clear picture of persistent weakness in consumer demand, largely attributed to the relentless pressure of rising prices on household budgets.

The CBI’s monthly gauge, which measures how retail sales volumes compare with a year earlier, registered at -34 this month. This marks an improvement from June’s sharper decline of -46, but it remains firmly in negative territory, indicating that more retailers are reporting a decrease in sales than an increase. The measure of expected sales for August also showed a slight uptick, rising to -31 from -49, suggesting a glimmer of cautious optimism, though a significant recovery is not yet on the horizon.

Understanding the CBI Distributive Trades Survey

The CBI Distributive Trades Survey is a crucial barometer for the health of the UK retail sector. Unlike official government statistics that measure actual sales volumes and values, the CBI survey provides a qualitative assessment based on the sentiment of leading retailers and wholesalers across the country. Participants are asked whether their sales volumes are “up,” “down,” or “the same” compared to the previous year. The “weighted balance” figure is then calculated by subtracting the percentage of firms reporting a decrease from the percentage reporting an increase. A negative balance, therefore, signifies a net decline in sales.

The survey’s strength lies in its timeliness, often providing an early indication of trends that may later be confirmed by official data. The latest figures, collected between June 27 and July 15 from responses of 56 retailers and 91 wholesalers, offer a snapshot of the challenges faced by businesses on the ground. The consistent negative readings since October 2024 underscore a prolonged period of consumer caution and reduced spending, impacting not just retail but also wholesale and motor trades, as noted by Martin Sartorius, Principal Economist at the CBI. “Firms reported that elevated price pressures – driven by rising labour costs – and economic uncertainty continue to weigh on household demand, which has contributed to sales volumes falling since October 2024,” Sartorius stated.

The Inflationary Squeeze: A Persistent Headwind for Households

At the heart of the retail downturn is the stubborn inflation rate, which rose to 3.6% in June, as measured by the Consumer Prices Index (CPI). This figure, reported by the Office for National Statistics (ONS), represents an increase from 3.4% in May and is the highest since January 2024. While a significant improvement from the peak of 11.1% in October 2022, it remains well above the Bank of England’s (BoE) target of 2%, signaling a continued erosion of household purchasing power.

The upward pressure on inflation in June primarily stemmed from several key areas:

• Petrol Prices: Motor fuel prices did not fall as significantly in June as they did in the same period last year, contributing to the overall rise in the CPI.
• Food Price Inflation: This has been a persistent concern, rising to 4.5% in June 2025, the highest rate since February 2024. This directly impacts household budgets, as food is an essential expenditure.
• Core Inflation and Services Inflation: The annual rate of “core inflation” (excluding volatile energy, food, alcohol, and tobacco) also rose to 3.7% in June, up from 3.5% in May. Services inflation remained elevated at 4.7%. The Bank of England pays close attention to services prices as they are considered a better indicator of domestic inflationary pressures, less influenced by global commodity price swings.

This sustained period of high inflation means that despite some wage increases, many households are experiencing a “real wage squeeze” – their earnings are not keeping pace with the rising cost of living. This forces consumers to make difficult choices, often cutting back on discretionary spending in areas like clothing, household goods, and leisure activities, to prioritize essential items.

Monetary Policy and its Ripple Effects: The Bank of England’s Stance

In response to persistent inflation, the Bank of England’s Monetary Policy Committee (MPC) has maintained a cautious stance on interest rates. The current Bank of England base rate stands at 4.25%, a level it has held since the MPC’s meeting on June 19, 2025. This decision reflects the central bank’s ongoing battle to bring inflation back to its 2% target without unduly stifling economic growth.

High interest rates have a direct impact on consumer spending. For homeowners on variable-rate or tracker mortgages, monthly repayments have increased significantly, diverting a larger portion of their disposable income towards housing costs. This reduces the money available for other purchases. While fixed-rate mortgage holders are shielded for now, many will face higher costs when their current deals expire, further tightening household budgets in the coming months and years. Similarly, the cost of borrowing for other forms of credit, such as personal loans and credit cards, has also risen, discouraging consumers from taking on new debt for purchases.

The Bank of England’s next base rate meeting is scheduled for August 7, 2025. While some analysts anticipate further rate cuts later in 2025, possibly bringing the base rate down to around 3.75%, the Bank has consistently reiterated that its monetary policy is not on a pre-set path and will remain responsive to evolving economic conditions, particularly inflation data. This uncertainty adds another layer of caution for both consumers and businesses.

Government Policy: The Cost of Doing Business

Employers’ groups have voiced concerns that recent government policy decisions are contributing to the elevated price pressures experienced by retailers. Specifically, the decision by Finance Minister Rachel Reeves to increase social security contributions for staff, alongside an increase in the minimum wage, is cited as adding to businesses’ operating costs.

The increase in National Insurance contributions (NICs) for employers, while aimed at shoring up public finances, directly raises the cost of employment for businesses. This is particularly impactful for sectors like retail and hospitality, which are typically labor-intensive and operate on tighter margins. Businesses facing higher wage bills due to NICs may pass these increased costs onto consumers through higher prices, further fueling inflation.

Furthermore, the increase in the National Living Wage (NLW) – which is expected to rise to £12.21 for workers aged 21 and over from April 1, 2025 – while beneficial for low-paid workers, also presents a significant cost challenge for businesses. According to analyses by organizations like GoForma and Activ People HR, this increase will benefit over three million workers, particularly those in low-paid jobs. However, employers, especially small and medium-sized enterprises (SMEs), express concerns about the impact on their profit margins. Some businesses may be forced to absorb these costs, reduce hiring, cut hours, or, indeed, raise prices to offset the impact. While historical data suggests no strong correlation between minimum wage hikes and increased unemployment or widespread bankruptcies, the current inflationary environment amplifies the pressure on businesses. The debate centers on how much of these increased labor costs can be absorbed by businesses versus how much is passed on to consumers, contributing to the very inflation the government and central bank are trying to combat.

Shifting Consumer Behavior: The Rise of Online and Value-Conscious Spending

Amidst the economic squeeze, consumer behavior is undergoing notable shifts. While overall retail sales volumes remain weak, online sales have shown a glimmer of resilience. The CBI survey noted that online sales volume rose for a third consecutive month in July, albeit marginally. More detailed data from the ONS for June 2025 indicates that online spending values rose by 2.3% month-on-month and 4.5% year-on-year. Consequently, the proportion of sales made online increased from 27.4% in May to 27.8% in June.

This trend underscores the ongoing structural shift towards e-commerce, accelerated by the pandemic, where convenience and price comparison often drive purchasing decisions. Consumers are increasingly comfortable browsing and buying on their mobile devices, especially for non-food categories like homewares, furniture, and DIY, where there’s a return to “considered buying” after a period of deferred larger purchases. This suggests that while overall spending is constrained, consumers are still investing in improving their living spaces, reflecting the continued prevalence of remote working.

Barclays’ data on consumer spending in Q1 2025 showed a modest 0.4% increase in household spending growth (adjusted for inflation) compared to Q4 2024. While essential spending saw a slight increase, non-essential spending also grew, albeit with consumers adopting “savvy, cost-saving approaches.” This includes actively seeking out discounted items, utilizing loyalty schemes, and taking advantage of post-Christmas offers. This indicates a bifurcated market: consumers are still spending, but they are more discerning, value-conscious, and willing to seek out deals.

Broad-Based Weakness Across the Distribution Sector

The weakness in demand is not confined to retail alone. Martin Sartorius of the CBI highlighted that the downturn was “mirrored across the distribution sector,” with wholesale and motor trades also experiencing declining sales. This indicates a broader lack of confidence and reduced activity across the supply chain.

• Wholesale Trade: A decline in wholesale sales suggests that retailers themselves are ordering less from their suppliers, anticipating continued weak consumer demand. This creates a ripple effect, impacting manufacturers and logistics providers further up the supply chain.
• Motor Trade: Falling sales in the motor trade sector reflect lower consumer confidence in making large, discretionary purchases like new cars. High interest rates also make car financing more expensive, further deterring buyers. This sector is often a bellwether for broader economic sentiment, and its decline signals caution among both individual consumers and businesses.

The official data for June, while showing a slight rebound in overall retail sales volumes (up 0.9% month-on-month) after May’s significant fall, also revealed a weaker underlying trend. In the three months to June, sales volumes rose by a mere 0.2%, marking the weakest increase since the three months to February. This suggests that any monthly improvements are fragile and do not yet signal a robust recovery.

Economic Outlook and Future Prospects

Looking ahead, the outlook for the UK economy and its retail sector remains cautious. The International Monetary Fund (IMF) projects UK GDP growth at 1.2% in 2025, gaining momentum in 2026, but notes that “weak productivity continues to weigh on medium-term growth prospects.” Similarly, the Centre for Economics and Business Research (Cebr) projects GDP to expand by 1.2% in 2025, “firmly below the historical trend,” with inflation expected to peak at 3.7% mid-year and average 3.3% across 2025.

For the retail sector, this translates to continued headwinds. PwC’s Retail Outlook 2025 highlights that retailers face a “margin squeeze with a mix of topline pressure and cost headwinds.” They anticipate “more subdued growth as normalised levels of inflation return throughout 2025.” While some categories like food stores and health & beauty are proving more resilient, others such as textiles & clothing and household goods continue to struggle.

A significant factor for recovery will be a sustained fall in inflation, which would ease the pressure on household disposable incomes. Real household disposable income per head decreased by 1.0% in Q1 2025, following growth in Q4 2024, indicating the continued squeeze. A rebound in consumer confidence, potentially driven by lower inflation and stable interest rates, would be crucial for stimulating discretionary spending.

The retail sector’s ability to adapt to evolving consumer preferences, particularly the shift to online shopping and the demand for value, will also be key. Retailers are increasingly investing in technology to enhance customer experience, optimize supply chains, and improve operational efficiencies to mitigate cost pressures.

Broader Implications for the UK Economy

The prolonged retail downturn has broader implications for the UK economy:

• Business Investment: Weak consumer demand often leads businesses to defer investment decisions, impacting long-term productivity and growth.
• Employment: While the overall labor market has shown resilience, persistent weakness in retail could lead to job losses in the sector, particularly in brick-and-mortar stores.
• Government Revenues: Lower consumer spending can impact VAT receipts, affecting government tax revenues and potentially influencing future fiscal policy decisions.
• Economic Sentiment: A struggling retail sector can dampen overall economic sentiment, creating a feedback loop of reduced confidence and spending.

In conclusion, the UK retail sector is navigating a challenging period marked by elevated inflation, high interest rates, and increased operating costs. While there are signs of adaptation, particularly in the online space, and some moderation in the pace of decline, a robust recovery hinges on a sustained improvement in macroeconomic conditions, particularly a significant easing of inflationary pressures and a rebound in real household disposable income. The coming months will be critical in determining whether the sector can find its footing and return to sustainable growth.

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photo source: Google

By: Montel Kamau

Serrari Financial Analyst

29th July, 2025