LONDON — Bank of England Governor Mark Carney on Thursday said that a consumer slowdown in the British economy has now started in earnest, as rising inflation officially starts to hit regular Brits.
Since the Brexit vote, economists have warned about a potentially rapid slowdown in consumer spending, as Brexit-driven inflation starts to impact the ability of British households to spend money on non-essential items like clothing and eating out.
Speaking following the release of the BOE’s Quarterly Inflation Report, Carney told reporters that that slowdown is officially underway. “For some time, the responses of financial markets and households to the UK’s decision to leave the EU have diverged,” he said.
“In its February projections, the MPC expected that this tension between consumer strength and relative financial market pessimism would be reduced over the course of this year. That process has now begun. With wage growth moderating and inflation picking up, both household spending and GDP growth have slowed markedly.”
Average citizens are starting to feel the pinch as inflation is currently outpacing wage growth, meaning that Brits are essentially earning less than prices are rising, squeezing their ability to spend on discretionary items.
At the last reading, inflation hit 2.3%, while wage growth was 2.2%.
Looking to reassure British consumers, Carney noted that the bank does not expect that slowdown to continue for a substantial period, arguing that the downward pressures on wage growth are unlikely to hang around long.
“The factors currently weighing on wage growth are unlikely to persist, and it [the MPC] projects that wages will rise significantly as the output gap narrows throughout the forecast period and closes by the end,” he said.
Earlier the BOE held interest rates at a record low of 0.25% and left its QE programmes unchanged, while also trimming growth forecasts marginally, dropping its 2017 forecast from 2% at February’s Inflation Report to 1.9% in May.
“The Committee judges that consumption growth will be slower in the near term than previously anticipated before recovering in the latter part of the forecast period as real income picks up,” May’s Inflation Report noted.
For 2018, the BoE revised its growth forecast slightly upward from 1.6% to 1.7%. 2019 growth will be 1.8% compared to a previous 1.7%.