LONDON: Inflation at 2.9% and wage growth lagging behind has meant household consumers in the UK are under intense pressure from rising living costs. The IHS Markit Index and Survey measures how people feel about their current situation. The June reading changed from 43.8 from 42.6, indicating that households are the most pessimistic about their finances than they have been in three months.
Reports have linked this to the latest Consumer Price Index readings combined with inflation and interest rate expectations. It is no surprise that with weakening economic indicators and an uncertain political outlook that sentiment is falling. The fall in the British pound, following the 2016 Brexit vote, is seemingly being blamed for this fall in consumer confidence and climb in inflation. Prior to the referendum last June, official inflation was just 0.3%. Whilst the pound has recovered slightly from it’s tumble post General Election, general sentiment regarding the currency and the general political and economic situation, is weak. Following the Brexit shock the fall in sterling pushed up the cost of imported goods.
The IHS Market survey also showed that 58% of respondents expect the Bank of England’s Monetary Policy Committee (MPC) to raise interest rates in 12 months’ time. Following the Brexit vote, less than half of the number of people expected this to happen, suggesting consumers were unprepared for the economic hardship that was coming their way. Consumers might not be wrong to expect a rate hike in the next year. Minutes from the MPC’s June meeting showed that three members (of eight) voted for a rate increase. Rates currently stand at 0.25%.
Usually the Bank of England would look to raise interest rates given the continuing climb above the inflation target. However, these results not only suggest the MPC will have to wait longer but that they will also be unable to inject more cash into the economy. This would perhaps not be a bad thing, in the long run. One of the major products contributing to the increase in inflation this month was apparently package holidays, highlighting the growing cost of foreign travel at current sterling prices. The second product highlighted by the Office of National Statistics to be contributing to inflation was computer games. We’re fairly sure that consumers have been feeling the pinch regardless of whether they like a trip to Brittany or enjoy a late-night session of World of Warcraft. Wage growth consistently fails to keep up with inflation and the UK’s household debt to income ratio shows Brits are consistently spending more than they are earning.
