LONDON — Two recent surveys show Brexit-driven inflation is putting a real squeeze on consumer spending.
IHS Markit’s survey of household finances found the steepest deterioration for three years in May, largely as a result of rising inflation.
And the Bank of England’s agents’ report of business conditions found: “Consumer spending growth had moderated in real terms, as spending power had been hit by higher prices.”
Inflation hit 2.7% in April, its highest level since the summer of 2013, and is outpacing wage growth. This trend is set to continue, with the Bank of England forecasting inflation to peak at around 3% this year and employers expecting wage rises of just 1% in the next 12 months.
Chris Williamson, IHS Markit’s chief business economist, says: “Views on future finances also took a renewed downward lurch, resuming a worsening trend that has been evident over the past year.”
Inflation is rising fast due to the fall in the pound last year, following June’s vote to leave the European Union. Sterling fell immediately against the dollar and the euro in the wake of the vote and has struggled to recover since.
This has taken a while to filter through to the price of many consumer goods as most large companies will hedge currency exposure, agreeing to fix exchange rates in advance to avoid being hit by big swings in rates. However, as these hedging contracts come up for review, price rises have begun to filter through.
Williamson warns that IHS Markit’s findings suggest: “Growth of retail sales and other measures of consumption will continue to be limited in coming months.”
This could be devastating for economic growth in Britain. The vast majority of GDP growth in Britain was driven by household consumption last year and this has been the trend for the last six years. If consumers stop spending, growth could grind to a halt.
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