Rising UK energy prices are set to leave the typical household £480 worse off in 2026, reducing consumer spending power and adding fresh pressure across the retail sector, according to new analysis from the Resolution Foundation.
The report links the decline in real incomes to higher gas, electricity and fuel costs following disruption in global energy markets. It finds that a modest improvement in living standards expected earlier this year has now reversed, with average household income forecast to fall by 0.6%.
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For retailers, the shift signals weaker discretionary spending and continued volatility in demand patterns, particularly in mid-market and non-essential categories.
Income squeeze hits consumer demand
The projected £480 annual loss reflects a sharp turnaround from earlier forecasts of 0.9% income growth.
Higher energy bills and fuel costs are expected to be passed directly to households, limiting disposable income across all demographics.
James Smith, Chief Economist at the Resolution Foundation, said: “Many households face a decline in their purchasing power this year.” He added that the impact “will run right through the income distribution.”
This broad-based squeeze is significant for retail. Middle-income households, which drive a large share of discretionary retail spend, are now expected to see income fall rather than grow.
In practical terms, this typically leads to reduced basket sizes, delayed purchases and increased price sensitivity—trends already observed during previous cost-of-living pressures.
Uneven impact across income groups
The report highlights a mixed picture across different household types.
Lower-income households will still see some income growth, estimated at 1.2%, supported by benefit increases. However, this is down sharply from earlier expectations of 2.8%.
Families with three or more children in the lower half of the income distribution are an exception. Following policy changes, their incomes are projected to rise by 7.7% this year.
By contrast, poorer households with fewer children are expected to see little or no income growth.
For retailers, this divergence may lead to uneven demand across regions and customer segments. Value retailers and discount formats could benefit from tighter household budgets, while premium and discretionary categories may face slower sales.
Retail outlook linked to energy market volatility
The outlook for UK energy prices remains uncertain, with the report noting that costs are still “well above pre-war levels”.
Even with a ceasefire in the Middle East, market pricing suggests limited short-term relief. Energy costs are expected to remain a key driver of inflation and consumer behaviour throughout the year.
The think tank has called for a targeted “social tariff” to support vulnerable households ahead of winter, warning that energy costs will hit hardest during colder months.
For the retail sector, sustained pressure on household finances is likely to shape trading conditions into late 2026. Businesses may need to adjust pricing strategies, inventory planning and promotional activity to reflect continued caution among consumers.
The data reinforces a central trend in UK retail: energy-driven cost pressures are no longer confined to utilities but are now a core factor influencing consumer demand and sector performance.
