Gap between inflation and wage growth weighs on consumer confidence

Alys Key
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Spending is down across both discretionary and essentials categories (Source: Getty)

Consumer confidence suffered its biggest decline in two years in the second quarter of 2017, as high inflation took its toll on spending power.

Confidence fell for the third consecutive quarter to -10 per cent, down from -7 per cent, according to Deloitte's consumer tracker.

Sentiment was lower for five of the six confidence measures analysed in a survey of 3,000 people.

Consumers felt particularly gloomy about their amount of disposable income and levels of debt, with confidence in both areas decreasing to the lowest levels since 2014.

Read more: Glimmer of hope? UK wage growth rises - but is still well below inflation

“A squeeze in living standards has dented consumers’ spirits," said Ian Stewart, chief economist at Deloitte.

“Consumers are feeling the pinch from higher inflation, but the tracker shows that sentiment about job opportunities, career progression and job security are higher than they were a year ago.”

The report comes ahead of the publication of the Consumer Price Inflation (CPI) for June tomorrow, which is expected to remain at May's level of 2.9 per cent, the highest for four years.

With earnings growth around the two per cent mark, consumer spending power has shrunk for the first time in three years.

Read more: UK families hit with biggest decline in spending power since 2013

Deloitte's survey found that this has already had an impact on shopping habits. Spending on essential items fell four points to eight per cent, while discretionary spending fell three points to -7 per cent.

Spending was even down in leisure activities such as eating out, suggesting a downturn in the recent trend for consumer spending on experiences over purchases.

An increase in CPI could heighten pressure on the Bank of England to raise interest rates above 0.25 per cent.

Read more: Pound slides as Ben Broadbent says he's 'not ready' to raise rates

However, Deloitte's report noted that increasing interest could slow spending growth in light of the enlarged consumer debt pile.

Ben Perkins, head of consumer business research at Deloitte, said sending was “far away from a total drop-off.”

He added: “Even a dry, hot summer may be a sufficient catalyst to lift consumer spirits in the short term.”

Read more: Why interest rates predictions have suddenly shifted

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