U.K. consumers, touted by Mark Carney as a key to the economy’s performance, may find the squeeze on their pockets gets a little tighter this week.
While inflation’s acceleration probably paused in March -- partly due to the timing of Easter -- another weakening in wage growth means pay isn’t keeping pace with price increases. That’s all going to feed into household spending habits in 2017, and there are already signs of a slowdown. According to a Visa index published Monday, consumer-expenditure growth in the first quarter was the weakest in more than three years.
The inflation and wage numbers due this week reflect the two sides of the debate among Bank of England policy makers including Carney, the governor. Price growth is already above the BOE’s 2 percent target, and Kristin Forbes voted for a rate increase last month because of the view that it will stay there for at least three years. For the majority, however, weak wages mean domestic price pressures aren’t building and there’s no need to rush into tightening.
Carney said last week that the strength of household spending has been one reason for the economy’s growth in the second half of 2016. But, echoing his dovish colleague Gertjan Vlieghe, he also said there have been some signs of a slowdown. Retail sales have plunged in the past three months and consumer confidence has been on a downward trend since early 2016.
“Worrying for U.K. growth prospects, the fundamentals for consumers look odds-on to weaken markedly further over the coming months as rising inflation eats further into purchasing power,” said Howard Archer, chief U.K. economist at IHS Markit in London.
The inflation pickup is being fueled by the pound’s decline following the Brexit vote and the effects are being felt by consumers already. A period of food-price deflation has come to an end, and Pernod Ricard SA, whose brands include Absolut vodka and Martell cognac, is raising prices in the U.K. to offset the depreciation.
The National Institute of Economic and Social Research published its estimate for first-quarter GDP on Friday, saying growth probably cooled to 0.5 percent from 0.7 percent in the final three months of 2016. The median forecast of economists surveyed by Bloomberg is for 0.4 percent, with a further weakening to 0.3 percent this quarter.
“A key component of this moderation has been relatively weak retail sales in the first two months of this year,” said James Warren, a research fellow at Niesr. “Consumption is expected to moderate further.”
Warren expects the doves to continue to hold sway at the BOE for some time. In his view, the central bank will “look through this temporary shock to inflation” and keep loose policy.
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