The UK’s new worker rules are quietly fueling an economic headache
The British Retail Consortium (BRC) has warned that high employment costs are set to keep UK inflation stubbornly above the Bank of England’s 2% target for the foreseeable future.
Responding to the Bank of England’s latest interest rate decision and Quarterly Monetary Policy Report, BRC Chief Executive Helen Dickinson highlighted the ongoing pressures on consumers and businesses.
“Borrowers must wait at least another month to see if mortgage costs come down, adding to the squeeze on consumers, who also face high food prices and rising unemployment,” Dickinson said.
The Bank’s Monetary Policy Committee (MPC) voted narrowly 5-4 to maintain Bank Rate at 3.75%, with four members favouring a 0.25 percentage point cut.
Stubborn inflation
The decision reflected caution amid persistent inflation pressures, particularly in food, driven by elevated wage and price pressures. The Bank anticipates inflation easing toward the target in the coming months, potentially dipping to around 2.1% by Q2 2026, thanks to falling energy prices and Budget measures, but recent data shows stickiness.
This aligns closely with retail sector realities. The latest BRC-NIQ shop price monitor revealed shop price inflation accelerating to 1.5% year-on-year in January 2026, the highest since February 2024 and well above expectations of 0.7%.
Food inflation jumped to 3.9% from 3.3% in December, with fresh food up to 4.4% amid weak supply in items like meat, fish, and fruit. Non-food prices reversed declines, rising 0.3%. Retailers attribute much of this to absorbed costs from:
- The recent increase in employer National Insurance Contributions;
- Sustained higher wage bills;
- The new packaging tax.
These have fed through to prices, with energy costs also playing a role. Broader grocery inflation eased slightly to 4% in late January (per Worldpanel by Numerator), the lowest since April 2025, as shoppers shifted toward healthier options like fruit, yoghurt, and protein-rich foods, but underlying pressures remain.
Labour policies are hurting businesses
Dickinson cautioned that upcoming government policies risk prolonging this. The Employment Rights Act 2025 (which received Royal Assent in late 2025) introduces phased changes, with consultations and implementations rolling out in 2026.
Key concerns for retail include proposals on guaranteed hours, shift changes, and handling seasonal work, which could impose substantial administrative and cost burdens while reducing job flexibility.”
Several proposals within the new Act, such as on guaranteed hours, could create a substantial cost and administrative burden for retailers, while limiting job flexibility and employment opportunities,” she warned.
Industry voices, including the BRC, have highlighted risks: over half of retail HR directors surveyed in earlier analysis expected reduced hiring and flexibility, with potential negative business impacts. Sectors reliant on part-time and variable hours, like retail, face the brunt, potentially leading to higher staffing costs that feed back into prices.
While the Bank signals scope for future rate reductions if disinflation continues, Dickinson urged collaboration: “By working with retailers to design policies which work in the real world, Government can get the implementation right and raise standards without harming entry-level and flexible jobs, or pushing inflation back up.”
The picture is one of cautious optimism tempered by realism. With food prices showing volatility (official food inflation at 4.5% in December 2025 before recent shop data), and labour reforms looming, the fight against persistent inflation increasingly hinges on balancing worker protections with economic realities.
