Fall in spending power

Fall in spending power

After inflation, spending power fell in April by 0.9% from a year earlier – equivalent to almost £100 a year less to spend on non-essential items – driven by falling real incomes, Lloyds TSB has reported.

Despite recent falls in inflation, real incomes fell by 1.6% in April as earnings before inflation grew at their slowest pace since February 2011 (2.2%).

Spending on essential items continues to grow at a fast pace, with annual growth at 4.6% in April.

Within essential spending there were rises in spending on both gas and electricity (11.7%) and water bills (9.1%). However, these were offset by falls in the growth in spending on food (6.8%) and fuel (6.8%). Lloyds TSB said that consumer research indicates that more than 86% of consumers have noticed the cost of essentials and everyday spending increase in the past 12 months. This compares to 73% in March, indicating that a growing number of people are feeling a noticeable effect from rising prices on their pockets.

Patrick Foley, chief economist at Lloyds TSB, said: “Household finances are still under real pressure despite the significant falls in inflation we have seen over the past seven months. Although unemployment has been broadly stable, wage growth has eased and so incomes are growing well below their long term average.

“Even though we expect to see further falls in inflation, the weakness in the broader economy is likely to mean that consumers aren’t going to feel any better off in the near future.”

In line with official figures released in April that confirmed the UK is back in recession, negative perceptions of the UK’s financial situation grew during the month, with the proportion believing the situation is ‘not at all good’ increasing from 45% to 51%. By contrast, just 8% believe it to be good.

The proportion who views the UK’s level of inflation as being ‘not at all good’ spiked by six percentage points to 34% between March and April. In particular, rises in food and clothing prices were cited as causing concern. But despite the perception of rising prices, consumer spending on food and drink is easing – falling back from its record high of 7.5% in March to 6.8% in April.

Following the spike in spending on vehicle fuel towards the end of March, in reaction to the threat of a fuel distribution strike, spending growth declined by 1.1 percentage points in April leaving the annual growth rate (6.8%) at its lowest level since the series began and well below the peak of 15.4% seen in March 2011.

Nonetheless, 37% of consumers feel that they are spending a lot more on petrol and diesel compared to the same time last year, while 67% have seen an increase in their spending to some degree. This compares to 64% who stated they had felt an increase to some degree in the 12 months to March.

People also continue to see an increase in spending in other areas, with 67%, 47% and 60% saying that they are paying more now compared to the same time last year on gas/electricity, water rates and household groceries respectively.

Since January 2012 between 18-19% of people state that they spend all of their income on household bills and essentials. While this figure has remained fairly constant, the proportion saying they spend around three quarters of their income increased from 45% in March to 48% in April.

It remains to be seen whether this trend will be continued, but it is perhaps a further indication of the impact high inflation and weak income growth is continuing to have on consumer spending power.

Jatin Patel, director of current accounts for Lloyds TSB, said: “There was little respite for consumers in April and it is clear that a growing number are feeling concerned about the state of the UK’s economic situation.

“This will not have been aided by news suggesting that the UK has entered into a double dip recession, while continued weak income growth and rising prices act as a very tangible drag on sentiment.

“While spending power is not being eroded at quite the same pace as the beginning of last year, events in the global economy will likely have a significant bearing on consumer spending power in the months ahead.”