Inflation’s hold on the U.K. consumer is getting tighter.
Consumer spending fell an annual 0.8 percent in May, the first decline in almost four years, according to a report by IHS Markit and Visa published Monday. The report tallies with numbers from the Confederation of British Industry, which showed a drop in retail demand last month after an Easter-related surge in April.
Inflation has accelerated over the past year, reflecting higher energy costs and the pound’s decline since the European Union referendum. Price pressures are expected to keep rising, putting pressure on households as earnings aren’t keeping pace.
There’ll be further evidence of the squeeze this week, with data forecast to show inflation held at 2.7 percent last month, outstripping a 2 percent annual increase in wages in April. Economists expect inflation to reach about 3 percent by the end of the year.
Negative Outlook
“The outlook for consumer spending continues to look relatively bleak,” said Annabel Fiddes, an economist at IHS Markit.
The outlook for prices and earnings is central to the policy debate at the Bank of England, which announces its next decision on Thursday. Governor Mark Carney, who was in purdah during the election campaign will speak later that day at the high-profile Mansion House dinner in London’s financial district.
Consumer spending could come under additional pressure if there’s concern about the foundations of the coalition government formed after last week’s election, and the repercussions on Brexit negotiations and the economy. Sterling declined after the results showed the Conservative Party lost its parliamentary majority, adding to upward pressure on import prices.
“One of the uncertainties with the forecast is the extent and timing of the effect of the pass-through of exchange rate weakness to higher import prices,” said Sam Hill, an economist at RBC Capital Markets. “This is an even bigger uncertainty in the aftermath of the election, where the exchange rate has suffered again.”
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