UK shoppers are in the teeth of a squeeze on their pockets, and they’re going to have to ride it out for the rest of the year.
That’s the view of Bank of England Governor Mark Carney, who said this month that consumers may have to wait a bit longer to see real wage growth again. Data next week will reinforce that view, with inflation continuing to outpace incomes, leaving retail sales struggling to build momentum.
UK consumers, whose resilience was a key buttress of the UK’s initial performance after the Brexit referendum last year, have lost some of their muscle in 2017. With the pound’s drop fuelling higher prices, they’ve been feeling the pinch, and a report earlier this week showed households cutting back on spending for a third month in July.
“It will continue to feel like this, but then, as we move into the new year, we see inflation start to come down and household income start to go up, so that we move out of this,” Carney said, after presenting the bank’s Inflation Report on 3 August. “I’m not saying 'roaring' out of this real income squeeze, but we move out of this real income squeeze.”
Earlier this month, Next Plc chief executive Simon Wolfson said that inflation would have to moderate before consumer spending improves. Although the fashion retailer reported better-than-expected sales in its most recent quarter, Wolfson said that the squeeze means that he doesn’t expect a spending boost before the end of the year.
Wage growth and inflation are at the heart of the debate among BOE policymakers as they balance the requirement to bring price growth back to their 2% target with the need to support the economy.
Low Interest Rates
The BOE kept interest rates at a record low this month, and gave inflation-squeezed households little to cheer by cutting their forecasts for pay growth over the next two years.
Economists are also pessimistic about the chance of a quick end to the strain on consumers. Bloomberg surveys predict that inflation quickened to 2.7% in July and underlying wage growth stayed at 2% in the second quarter, even with unemployment at the lowest in more than four decades.
“[With the economy posting] lacklustre growth rates [companies are] unlikely to be falling over themselves to raise wages,” said Alan Clarke, an economist at Scotiabank in London. “Put another way, since productivity growth is likely to be close to zero by end-year, there is unlikely to be substantial upwards pressure on real wage inflation.”