During the Asian session on Tuesday, September 29, the pound traded in a narrow range against the dollar, hovering around 1.3250. The latest UK shop price data gave the market fresh input for assessing the inflation path and the central bank's policy outlook.
According to the British Retail Consortium (BRC), annual shop price inflation in the UK slowed to 1.4% in September from 1.5% in August, slightly above the three-month average of 1.3%. Food inflation eased to 2.5% from 2.8%, while non-food inflation slipped to 0.8% from 0.9%. The BRC urged the Chancellor to cut business rates in the October 28 budget, citing rising cost pressures from the conflict with Iran.
Food and non-food inflation both ease, driven mainly by promotions and discounts
Food prices accounted for most of the change. Food inflation slowed to 2.5% from 2.8% as promotions pulled down meat and dairy prices. That relief was partly offset by poor harvests in Europe pushing fruit prices higher, while elevated commodity prices kept chocolate and confectionery expensive. Non-food inflation also eased to 0.8% from 0.9% as heavy discounting lowered the price of back-to-school essentials. Overall, shop price inflation slowed modestly, though the reading was slightly above the three-month average of 1.3%.
Retailers say they have absorbed multiple cost increases and are near their limit
BRC Chief Executive Helen Dickinson said retailers have absorbed a series of additional costs, but there is a limit to what businesses can bear. She pointed to higher business rates due in April, along with rising employment costs, energy bills and packaging taxes, and described the upcoming budget as a critical moment for the sector. The BRC wants Chancellor John Healey to use his October 28 tax and spending plan to help retailers with business rate relief, arguing this would help keep prices down. Retailers say they are nearing their limit as conflict-driven costs rise and the budget approaches.
A gap remains between shop prices and official inflation, with the energy shock not yet fully passed through
The softer shop price reading contrasts with the broader inflation picture. The UK's wider official consumer price index rose to 3.1% in August and is expected to climb above 4% by early 2027 due to an energy price shock linked to the conflict with Iran. That divergence suggests the pressures retailers describe have not yet fully fed through to shelf prices, even as promotions and discounts temporarily hold down the retail gauge. Energy is the swing factor: oil and gas prices tied to the conflict with Iran feed directly into retailer costs and shape the inflation outlook, so diplomatic headlines can quickly move UK rate and pound expectations.
The market is focused on official inflation data and the budget, with energy costs the key
The market may look past the small decline in shop prices and focus on the official inflation path, which is expected to rise above 4% next year. The BRC gauge is a narrow, backward-looking snapshot, so the market pays more attention to the broader official inflation path. A budget that delivers business rate relief would give retailers some respite, but it would not remove the wider energy-driven cost pressures. Attention now turns to the next official inflation reading, whether energy costs keep rising as the conflict with Iran continues, and what the October 28 budget offers retailers on business rates.
Slowing shop prices are unlikely to change the pound's direction, with energy and the budget the key variables
Shop price inflation slowed to 1.4% from 1.5%, with both food and non-food easing, which on the surface signals easing inflation pressure and could in theory reduce the urgency for the Bank of England to raise rates, a mild negative for the pound. But the market will likely look past this reading — the BRC gauge is a narrow, backward-looking snapshot with limited coverage and a clear gap versus the official inflation path. UK official CPI already rose to 3.1% in August and is expected to break above 4% by early 2027 due to the energy shock from the conflict with Iran, meaning the cost pressures retailers describe have not yet fully passed through to shelf prices. For the pound, the real variables are energy prices and fiscal policy. Oil and gas prices tied to the conflict with Iran feed directly into retailer costs and the overall inflation outlook, and any headline on diplomatic progress or an escalation of the conflict could quickly change market pricing for the Bank of England's rate path, and in turn the pound. In addition, the BRC is calling on the Chancellor to cut business rates in the October 28 budget; if the budget provides meaningful relief, it could ease retailers' cost pressures, but it would not eliminate the broader energy-driven inflation. As a result, the pound against the dollar is currently driven more by dollar moves, the US-UK rate differential and energy prices, and the shop price data alone is unlikely to change the currency pair's direction unless subsequent official inflation data confirms a significant easing or worsening of inflation pressure.
Summary
UK shop price inflation slowed to 1.4% in September, with food inflation down to 2.5% and non-food down to 0.8%, as promotions and discounts lowered prices, though poor harvests in Europe pushed fruit prices higher. The BRC warned that retailers are nearing their limit and called on the Chancellor to cut business rates in the October 28 budget. The softer shop price reading contrasts with official inflation: official CPI was 3.1% in August and is expected to rise above 4% by early 2027 due to the energy shock from the conflict with Iran. That gap shows retailer pressures have not yet fully passed through to shelves. Energy is the swing factor, and diplomatic headlines could quickly affect UK rates and pound expectations. Going forward, watch the next official inflation reading, whether energy costs keep rising, and what the October 28 budget does on business rates. Business rate relief would give retailers some respite, but it would not remove energy-driven cost pressures. (GBP/USD daily chart, source: E-Huitong) As of 10:21 Beijing time, GBP/USD was at 1.3253/54.