Political instability in Westminster has been making headlines over the past week as a result of the fallout from local election results, which could spell big change for the government. The results also add another layer of pressure for retailers already facing weak demand, higher employment costs and renewed inflation fears.
UK borrowing costs jumped on Tuesday as investors reacted to uncertainty over Sir Keir Starmer’s future, alongside fears that higher oil prices could keep inflation elevated. The 10-year gilt yield briefly hit 5.13 per cent, its highest level since the 2008 financial crisis, while the 30-year yield reached 5.81 per cent, the highest since 1998.
The immediate issue for the retail industry is not Westminster drama in itself, but what it does to the cost of capital, consumer confidence and the government’s room for manoeuvre.
Higher gilt yields can feed through to wider borrowing costs across the economy. That’s a stumbling block for retailers refinancing debt, funding store investment, rolling out logistics projects or backing ecommerce and technology upgrades. It also matters for consumers, as higher market rates can keep mortgage and credit costs elevated, squeezing discretionary spending.
The timing is not ideal for the industry. Retail sales fell three per cent year on year in April, according to the BRC-KPMG Retail Sales Monitor, with food sales down 2.5 per cent and non-food sales down 3.3 per cent. In-store non-food sales dropped four per cent, underlining the pressure on categories most exposed to changes in disposable income.
A leadership crisis could also complicate tax and spending policy at a time when retailers are already warning that government-imposed costs are feeding into prices, hiring plans and investment decisions.
The British Retail Consortium said retail employment costs rose by £5 billion in 2025 because of higher employer National Insurance contributions and the National Living Wage. It calculated that the cost of employing a full-time entry-level worker rose 10 per cent, while the cost of a part-time worker rose more than 13 per cent.
That cost pressure is already moving through the supply chain. 2 Sisters Food Group, one of the UK’s largest poultry suppliers, this week passed higher labour costs on to supermarket customers, in one of the clearest recent examples of policy-driven cost inflation reaching major retailers.
The danger for the sector is that political uncertainty narrows the options available to government. If investors demand a higher risk premium to hold UK debt, any administration faces less headroom for business rates reform, targeted support on energy costs, skills funding or measures to stimulate high street investment.
That could leave retailers facing the worst of both worlds, rising costs without meaningful policy relief.
There’s also a confidence effect, retail is unusually sensitive to political and economic signals because households can delay big-ticket spending quickly. A customer who’s worried about mortgage costs, energy bills or job security can cut back on fashion, homewares, electricals and hospitality almost immediately.
That’s particularly poignant for retailers heading into the second half of the year, when ordering decisions, promotional plans and Christmas stock commitments are already being made. Uncertainty over the direction of tax, employment policy and inflation makes planning harder, especially for businesses working on thin margins.
The political backdrop isn’t the only driver of the market moves. Reuters reported that inflation fears linked to higher energy prices from the Iran conflict were also pushing up borrowing costs, with investors weighing the possibility that the Bank of England may need to raise interest rates if price pressures persist.
Energy and fuel costs touch almost every part of the operating model, from distribution and refrigeration to store heating, supplier costs and consumer petrol spending.
The BRC has already called on the government to act on rising domestic policy costs as the Middle East conflict fuels concern over food prices. Its polling found 80 per cent of people feared the conflict would push up food prices.
Food retailers may be better placed than discretionary chains to hold volumes, but supermarkets are still exposed to cost inflation, wage pressure and supplier negotiations. Any further rise in energy, packaging, transport or imported goods costs would make price investment harder to sustain.
For non-food retailers, the risks are sharper. Fashion, home, furniture and electricals are more dependent on consumer confidence and credit conditions. If gilt market volatility keeps borrowing costs high and sterling weakens, import-heavy retailers could face additional margin pressure from currency movements.
Sterling fell against the dollar on Tuesday as borrowing costs rose, according to Reuters. A weaker pound can raise the cost of dollar-priced imports, shipping, energy and raw materials, adding another inflationary channel for retailers and suppliers.
Banks also came under pressure amid concern over possible tax changes under a future administration. Lending appetite has lasting ramifications for store investment, private equity-backed chains, property transactions and restructuring activity. A more cautious financing market could slow expansion plans and make turnaround funding harder to secure.
The risk for government is that retail becomes both an inflation channel and an early warning sign. When costs rise, the sector can absorb some pressure through margin, push some to suppliers, reduce jobs or investment, or pass costs to shoppers. None of those options is painless.
The industry has already warned that higher taxes would lead to price rises, job cuts and delayed store openings. Last year, the BRC said 42 per cent of retail finance chiefs had frozen recruitment, 38 per cent had reduced in-store job numbers and 15 per cent had delayed opening new stores.
That means the political instability around Starmer’s premiership isn’t just a Westminster story for retail leaders. It affects the assumptions behind pricing, wages, investment and consumer demand.
If the government stabilises and markets regain confidence in fiscal policy, the impact on retailers may be limited to a short period of volatility. However, a prolonged leadership battle or a perception that fiscal rules could be loosened would keep pressure on gilts, sterling and inflation expectations.
For the industry, the key question is whether the government can provide enough stability to keep borrowing costs, tax policy and consumer confidence from becoming another drag on trading.
Until that becomes clearer, many retailers are likely to protect cash, scrutinise hiring and investment, and remain cautious on price cuts beyond targeted promotions.
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