Inflation rise puts the squeeze on UK household spending

The UK inflation rate rose to an unexpected high of 2.9 per cent in May, representing a further squeeze on consumer spending as price rises continued to outstrip wage growth.The consumer price index (CPI) measure of inflation hit its highest level since June 2013, largely as a result of a sharp increase in recreational and cultural goods and services: a sector that includes foreign holidays, the prices of which have risen sharply as a result of the fall in sterling's value since last year's EU referendum.The Bank of England had predicted that inflation would not rise to 2.8 per cent until later this year, peaking at three per cent next year.But Maike Currie, personal investment director at Fidelity International, said the latest data from the Office for National Statistics (ONS) showed that inflation had already reached “eye-watering” levels.“Rising prices coupled with lacklustre earnings growth means our wages aren’t keeping up with the rising cost living. Our real income are being squeezed and we’re witnessing this impacting UK consumer spending, which fell for the first time in nearly four years in May as consumers tightened their belts," she said."This is bad news for an economy which relies on confident consumers spending on goods and services - already we are seeing signs of a stagnating economy as confidence among companies and consumers falter. Election result paralysis will only add to the UK economy’s woes.“Inflation never seems like a problem until suddenly it is and while it may be good news for borrowers, as it erodes the value of their debts, it has detrimental implications for savers, investors and retirees, chipping away at the value of future interest and dividend payments and eroding the worth of your capital pot. Once pricing pressures become entrenched, consumers’ feel the pain, businesses don’t invest and the stock market gets worried."Philip Shaw, an economist at Investec, said that unless sterling's value unexpectedly increased, inflation was likely to rise further in the coming months as the weaker pound continued to feed through to higher shop prices.
“Our view is that inflation will rise steadily to a little above three per cent by the summer,” he said. “However, should sterling resume an upward trend and energy prices slip further in dollar terms, there is a chance that inflation remains below the three per cent level.”Suren Thiru, head of economics at the British Chambers of Commerce (BCC), warned that businesses were being hit hard by the rise in inflation."Higher inflation is a key business concern as it squeezes margins and weakens their ability to invest, particularly during this time of heightened political uncertainty." he said. "The BCC's quarterly economic survey confirms that businesses continue to feel the inflationary pressures, with a significant proportion of firms struggling to absorb the rising cost of raw materials and other overheads."If the current political uncertainty persists, this is likely to increase the downward pressure on sterling's value, pushing inflation even higher over the next year."Amit Kara, head of UK macroeconomic forecasting at the National Institute of Economic and Social Research, added: "We expect inflation to rise further over the course of this year and to reach a peak in the final quarter of 2017."This spike in inflation will exert further downward pressure on real household disposable income, at a time when wage growth remains modest and in turn squeeze consumer spending."This squeeze on household budgets led to Frances O'Grady, general secretary of the Trades Union Congress, to call on the government to scrap the one per cent cap on pay rises in the public sector.“The election showed that working people are struggling. And the biggest price rises in four years won’t provide any comfort. Working people are still £20 a week off worse, on average, than they were before the crash – and now rising prices are hammering their pay packets again," she said.“The new government must stop the real wage slide. Ministers must focus on delivering better-paid jobs all around the UK. And it’s time to lift the artificial pay restrictions in the public sector. Our hardworking nurses and teachers are long overdue a pay rise.”

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