Rising prices are tightening Britons’ purse strings and deepening their gloom about the outlook for their finances, posing a risk to domestic demand in the economy.
Households are the most pessimistic about their financial prospects since 2013, IHS Markit said in a monthly survey published on Wednesday. A separate report from the Bank of England showed that the pound’s 17 percent fall since the June referendum to leave the European Union is damping retail sales, a trend that’s set to continue this year.
While the U.K. economy has fared much better than expected since last year’s Brexit vote, signs of an adverse impact -- mainly from faster inflation -- are emerging. Data on Tuesday showed Britain’s era of real wage growth is coming to an end as the weaker pound feeds through into prices. That’s bad news for an economy largely dependent on consumer spending to drive growth.
“A combination of rising inflation and subdued pay trends has forced households to recalibrate their expectations,” said Tim Moore, an economist at IHS Markit. “Stretched household finances will become a greater drag on consumer spending.”
With inflation now above the BOE’s 2 percent target, and set to stay there for some time, that’s posing a challenge to the central bank’s policy makers. They kept interest rates unchanged last week, though Kristin Forbes, one of its more outspoken officials, voted to raise the benchmark in response to the outlook for price growth.
The outlook for officials is further muddied by two years of impending divorce talks with European leaders, which U.K. Prime Minister Theresa May plans to start at the end of the month. A lack of clarity around Britain’s future trading arrangements is weighing on some companies’ long-term investment plans, the BOE said on Wednesday, though it noted that investment intentions rose in the short term.
Recruitment difficulties rose slightly, the BOE report said, amid a shortage of skilled and experienced staff. BT Chairman Mike Rake said on Bloomberg Television on Wednesday that access to skilled labor is one of the challenges now facing firms.