Chancellor Rachel Reeves will deliver her spring forecast today against a dramatically worsening economic backdrop, as surging oil and gas prices triggered by escalating conflict in the Middle East threaten to reignite inflation and pile fresh pressure on UK retailers.
While the update from the Office for Budget Responsibility was expected to show the UK broadly in line with fiscal forecasts, supported by a strong January budget surplus and easing inflation, events have rapidly overtaken the outlook.
UK gas prices have surged to a three-year high, with the month-ahead contract jumping to 148p per therm, almost double last week’s level.
Oil prices have also spiked sharply, raising fears of a renewed energy-driven cost-of-living squeeze.
For retailers, the implications are immediate and uncomfortable. Higher wholesale energy costs risk pushing up household bills later this year, squeezing disposable income just as consumer confidence had shown tentative signs of stabilising.
Petrol retailers have already warned pump prices will rise following the jump in crude, increasing transport and logistics costs across retail supply chains.
Any sustained increase in fuel duty (currently scheduled to rise from September) would further dampen consumer spending power, particularly in lower-income households that underpin value-led retail segments.
Financial markets have reacted swiftly. The FTSE 100 fell as much as 2.8 per cent in morning trading, with airlines and travel-linked stocks among the hardest hit as higher fuel costs and Middle East disruption weigh on demand.
The pound dropped to a near three-month low against the dollar, adding another layer of inflation risk by making imports more expensive, a key concern for fashion, homewares and grocery retailers reliant on overseas sourcing.
Perhaps most significantly for retail, money markets have sharply reduced expectations of near-term interest rate cuts from the Bank of England.
The probability of a March rate cut has fallen below 30 per cent, compared with around 80 per cent last week.
Fewer or delayed cuts would keep borrowing costs elevated for both businesses and consumers, prolonging pressure on mortgage holders and limiting any recovery in big-ticket discretionary spending.
Bond yields have climbed as investors price in the risk of an inflation spike, narrowing the fiscal headroom available to Reeves.
While she is not expected to announce major policy changes (the government has committed to one primary fiscal event per year in the autumn) any deterioration in the public finances later this year could limit the scope for retail-friendly interventions such as business rates reform or targeted consumer support.
Economists warn that a sustained 40 per cent increase in gas prices could add close to 0.7 percentage points to UK inflation via higher utility bills, while current oil levels could add a further 0.2 percentage points through petrol costs.
For grocery retailers in particular, renewed input cost inflation would likely revive pressure on supplier negotiations and pricing strategies, just as food inflation had begun to moderate.
The International Monetary Fund has said it is closely monitoring the situation, noting that energy price surges and financial market volatility are already disrupting trade and economic activity.
The extent of the impact will depend on how long the conflict persists, but the immediate effect is to inject fresh uncertainty into an already fragile recovery.
For retailers, the hopes of a smoother trading environment in 2026 have been disrupted.
If energy prices remain elevated, retailers face a renewed squeeze from three sides: higher operating costs, weaker consumer demand and the prospect of interest rates staying higher for longer.
Stability may remain the Chancellor’s watchword, but for the retail sector, volatility has firmly returned to the agenda.
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