By Andrew Phillips, Managing Director, V12 Retail Finance

As 2025 draws to a close, it's clear this year has been one of recalibration for UK retail. 

Inflationary pressures, shifting consumer behaviours, and structural changes have tested the resilience of the sector.

Yet, amid these challenges, opportunities have emerged for retailers willing to adapt and innovate.

2025 in numbers: Inflation and consumer confidence

The Consumer Prices Index (CPI) averaged 3.6% in October 2025, down from 3.8% in September, marking a steady easing from the highs of recent years. Food inflation, however, remained elevated at 4.9%, reminding us that cost-of-living concerns are still shaping household decisions. 

While inflation has cooled, consumer confidence hasn't fully rebounded. Households remain cautious, prioritising value and essentials over discretionary spending. This has driven strong performance in categories like home essentials and value retail, while premium and non-essential sectors have had to work harder to justify spend. 

Retail landscape: Digital dominance and structural shifts

2025 reinforced the long-term trend toward digital-first shopping. Online sales now account for over 27% of total retail, and hybrid shopping, where consumers blend online convenience with in-store experience, has become the norm. Retail parks and click-and-collect hubs have thrived, offering convenience and cost efficiency. 

At the same time, High Street challenges persist. Store closures accelerated in 2024 and continued into 2025, driven by rising costs and evolving consumer habits. Yet, this shift isn't the end of physical retail, it's a call to reimagine it. Retailers investing in experiential spaces, sustainability, and omnichannel integration are finding ways to turn footfall into loyalty. 

Cost pressures and resilience

Labour costs rose sharply in 2025 due to National Insurance and minimum wage increases, alongside packaging levies and business rate reforms. These changes squeezed margins, but they also accelerated investment in automation, AI-driven efficiencies, and supply chain resilience, moves that will pay dividends in the years ahead. 

Looking ahead: 2026 outlook

So, what does 2026 hold?

Forecasts suggest inflation will continue its downward trajectory, reaching around 2.1% by Q4 2026, close to the Bank of England's target. That's good news for household budgets and retail demand.

However, consumer sentiment will remain cautious. Value for money will dominate, but shoppers will also seek elevated experiences, sustainability, and health-driven choices. 

Predicted key trends for 2026:
Affordable and accessible → Value-driven shopping: Consumers will continue to seek competitive pricing and flexible payment options to manage budgets responsibly.
Elevated experiences → Personalised retail journeys: Retailers who combine convenience with tailored experiences, both online and in-store, will stand out.
Sustainability simplified → Responsible retailing: Clear sustainability credentials and ethical finance options will influence purchasing decisions.
Health as a lifestyle driver → Well-being and lifestyle choices: Demand for products that enhance lifestyle and comfort (e.g., home, leisure, fitness).

Technology will underpin all this, from AI-powered personalisation to frictionless finance options. At V12 Retail Finance, we see embedded finance and flexible payment solutions playing a critical role in helping retailers meet these evolving expectations. Giving customers ways to pay for the things they love, responsibly and transparently, will be central to driving growth.

A positive path forward

2026 won't be without its challenges: fiscal drag, rising employment costs, and global uncertainties will keep retailers on their toes. But the fundamentals are improving, real incomes are rising, inflation is easing, and innovation is accelerating. For retailers who embrace agility, invest in technology, and put the customer at the heart of every decision, the year ahead offers real potential.

As we move into 2026, let's focus on confidence, convenience, and connection. Retail is resilient because it evolves, and together, we can shape a future that works for businesses and consumers alike.

Sources
•    Office for National Statistics (ONS) - Consumer Prices Index (CPI) and food inflation data
•    Bank of England - Inflation forecasts for 2026
•    ONS Retail Sales Data - Online retail share and structural trends
•    Industry Reports - Hybrid shopping and retail park performance
•    V12 Retail Finance Analysis - Predictions for 2026 trends, consumer sentiment, and strategic insights on technology and embedded finance