Import inflation is back on the radar, even without a Pound Sterling slump.
The Bank of England now expects CPI to rise further through the rest of 2026, and the latest ONS data already show a sharp rebound in import prices.
If the British Pound weakens, or if US Dollar-priced freight, energy and software costs keep climbing, the pass-through into UK retail costs could broaden from fuel and food into core goods and operating expenses as well.
Import inflation is rising again, and sterling matters more than it first appears
The immediate story in Britain’s inflation outlook is energy. The broader story is exchange-rate pass-through. In its April Monetary Policy Report, the Bank of England said CPI had risen to 3.3 per cent in March and was likely to move higher later this year as energy prices fed through.
In two of its scenarios, using the market path for rates, inflation rises to a little over 3.5 per cent by the end of 2026 before easing back.
That is not just about petrol pumps and utility bills. The ONS import price series showed the Import Price Index up 4.2 per cent in the year to March, after just 0.6 per cent in February. On the month it rose 3.6 per cent, largely because of non-EU crude petroleum, while the sterling effective exchange-rate index slipped 0.4 per cent both on the month and on the year. That is not a dramatic currency move. It did not need to be.
The reason is fairly well understood now. The Bank’s own research says around 74 per cent of exchange-rate changes are passed through to aggregate import prices in the long run, and that pass-through is quicker when the move is driven by the US dollar. Another Bank paper notes that about 35 per cent of UK imports are invoiced in dollars even though only around 10 per cent come from the United States. In plain English, UK retailers can source from Asia, Europe or the Gulf and still find the bill is really a dollar bill.
That matters more than it sounds. The Bank has also estimated that around a fifth of final UK consumption is imported directly, with the true exposure higher once imported inputs are counted. If sterling gives back ground from here, especially against the dollar, the next leg of import inflation could arrive faster than many budget models assume.
The pressure is no longer confined to the goods line
Retail finance teams tend to focus on merchandise cost first. Fair enough. But the current inflation risk sits across the cost stack.
Freight remains the obvious one. UNCTAD’s latest maritime review said Suez Canal tonnage was still roughly 70 per cent below 2023 levels by May 2025, which tells you the system was already brittle before this year’s fresh geopolitical shock. The IEA’s April oil market report then documented a severe spring supply disruption, with North Sea Dated crude around $130 a barrel at the time of publication. The result for retailers is not abstract. Next said this month that it expected £27 million of extra international costs, mainly from higher air freight and local distribution, while Kingfisher told investors its freight was partly protected by annual contracts.
Energy is the second channel, and perhaps the trickier one because it filters in unevenly. ONS CPI data show petrol prices rose 8.6 pence a litre between February and March, while diesel rose 17.6 pence. Bank staff estimate that the indirect effects of higher energy prices add around a third of a percentage point to CPI in the third quarter, with food prices responding first and core goods and services following. Ofgem, meanwhile, says British electricity prices for medium-sized businesses remain 92 per cent above the EU median. Not ideal, to put it mildly.
Then there is software, which still tends to hide in separate budgets. Yet it is becoming a live FX channel for retailers with large cloud, e-commerce and logistics estates. AWS Marketplace says most purchases are priced in USD. Microsoft Azure pricing states that charges are calculated in US dollars and converted using London closing spot rates. Microsoft’s commercial pricing updates take effect from 1 July 2026, with existing customers seeing them from renewal. Kingfisher is one of the clearer UK examples here: it says it hedges not only inventory purchases but also smaller US-dollar IT contract exposures.
What procurement teams are watching now
The immediate complication is that retailers may struggle to pass these costs on cleanly. BRC shop-price data show overall shop inflation at 1.0 per cent in April, with non-food at minus 0.1 per cent, while the CBI’s latest retail survey says sales are poor for the time of year and expected to disappoint again in May. In other words, demand is soft and discounting is still doing some of the consumer’s inflation-fighting. Margins take the strain first.
That is why better teams are widening the FX map. They are looking beyond stock purchases to freight and insurance, both of which sit inside customs value under HMRC’s exchange-rate rules. They are also paying attention to timing. HMRC uses monthly customs rates, not whatever Pound Sterling happens to be doing when the container lands, and the official May rate is USD 1.3502 to the pound. For a business with regular shipments, that can create a lag between market moves, duty costs and reported gross margin.
The practical response is not glamorous, but it is effective. Build landed-cost reporting that captures freight, fuel and software alongside merchandise. Separate spot exposure from contract-reset exposure. Ask vendors for sterling billing where possible. Hedge known dollar renewals, not just stock buys. And keep a close eye on the Pound Sterling. It is entirely possible for UK inflation to edge higher again without any dramatic currency crisis. A firmer dollar, sticky freight, and weak pricing power would do the job just fine.
