Tuesday, 28 February 2017 09:45

We’re all out of ‘spending’ steam

UK inflation has hit its highest level in two and a half years and financial analysts expect inflation to climb further and surpass the 3 per cent mark later this year. That’s quite a bit above the Bank of England’s projection, who expect a peak at 2.8 per cent during 2018. In other words, average living costs have increased by the best part of 2 per cent in the last 12 months. So, have we really run out of ‘spending’ steam and will businesses compete more keenly as consumers' diminish their appetite to spend?

Unfortunately, this is the unavoidable cost that households around the country can’t avoid but be clobbered by. And if rising prices weren’t enough to get you running for the painkillers, the cost of living looks likely to rise further as the Local Government Association has said that 94 per cent of councils are intending to put up bills because their own finances are at “breaking point”, with a third of them planning to raise your council tax bill by more than 2% in April. Ditto gas and electricity bills, soon to resume their upward march and start landing on your mat as companies pass on their rising costs to consumers and the Big Six size up price hikes. The cost of essentials is catching up with pay and rising “must-have” prices are likely to have a disproportionate impact on consumer confidence and spending.

Delve deeper than the headlines and we can see two key developments. The first is the 4.2 per cent fall in clothing prices. The high street seems to be struggling, despite the January sales and discounts. Secondly, food prices have fallen since 2014 as supermarkets became engaged in a bitter price war. Not any more though, as the cost of imported food has been driven up and reflected in higher prices to pay at the checkout. Putting these two together is further evidence that the consumer may finally be running out of ‘spending’ steam. Surging inflation, when it comes to food and fuel prices are eating into disposable incomes more than ever, and in turn that is starting to hit spending.

CBI chief economist Rain Newton-Smith has said that it was “crucial” for the UK government not to add to consumer woes in the upcoming Budget, due on 8 March. In the CBI’s recent Budget submission to Chancellor Philip Hammond, Newton-Smith said: “While the economy has proved resilient, inflation is rising and growth is set to slow”. But thankfully, the government has no control over borrowing costs, which are set by the Bank of England, and it seems more than likely that interest rates will be held at their current record low of 0.25 per cent for some time to come.

At the end of the day, if the cost of living is going up, but your salary doesn’t increase at the same rate, then you are worse off. Rising prices will inevitably hit consumers’ wallets, particularly given the fact wage growth just isn’t keeping up, but, take solace in the good news here; the Bank of England is less likely to raise interest rates to ward off inflationary pay demands… for now.

As Chris Williamson, chief business economist at IHS Markit, has said: “While the further upturn in price pressures will fuel speculation that interest rates may start to rise later in 2017, the most likely scenario remains one of policy staying on hold over the next two years as the economy navigates through Brexit”. But, we doubt that won’t stop the British shopper feeling the pinch as the cost of the ‘must-have’ everyday purchases continue to mounts up.

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