Friday, January 28, 2022

Consumer spending set to slump to four-year low

Inflation, welfare cuts and weaker earnings is set to lead to a four-year low in consumer spending growth, an economic think tank says.

According to the EY Item Club, consumer spending is expected to reach its weakest rate since 2013, rising 1.7 per cent this year compared to a 12-year high of 3.1 per cent in 2016.

The think tank said inflation is forecast to reach a five-year high at 2.8 per cent this year, while growth in real earnings sinks to 0.1 per cent from 1.8 per cent in 2016.

Welfare cuts will put the squeeze on non-work incomes, leaving benefit claimants with less money to spend, EY Item Club added.

Those on lower incomes will also be hit badly as they have to navigate higher costs for food, energy and petrol.

EY Item Club senior economic advisor Martin Beck said it would be another two years before earnings growth picks up again.

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“Higher inflation will be the key culprit in the sharp slowdown in consumer spending growth this year, cutting off what has been an all-too-brief revival in real pay growth and continuing the dismal picture for real earnings seen since the financial crisis,” he said.

“There should be some improvement in 2018, as inflation begins to cool, but even then we anticipate real wage growth of just 0.7 per cent.

“It is likely to be 2019 before workers begin to enjoy more ‘normal’ rates of real wage growth again.”

The Office for National Statistics revealed last month that average food store prices increased by 0.5 per cent on the month in January – its largest rise since April 2013.

Inflation also reached a two-and-a-half-year high at 1.8 per cent in January and retail sales unexpectedly fell by 0.3 per cent in the month.

Rising import prices triggered by the post-Brexit referendum fall in the pound is often blamed for the hike in everyday prices as retailers pass the ballooning costs on to consumers.

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