Falling inflation fails to halt squeeze on spending power

Monday 20th February 2012

Consumers are suffering at the hands of the rising cost of essentials and weak income growth, leaving discretionary spending power squeezed further despite the latest falls in inflation, according to this month’s Lloyds TSB Spending Power Report.

After inflation, consumers’ discretionary spending power was 0.9% lower in January than the previous year, reducing the amount they have to spend on non-essential items by the equivalent of around £100 a year, or just under £10 a month.

Patrick Foley, chief economist at Lloyds TSB, said: "The competing effects of falling inflation against a weakening in the employment and income situation are set to be the dominant theme of the first half of 2012.

"The Spending Power Report shows that in January weakening income growth has outweighed the recent fall in inflation, ensuring that consumers are still being squeezed.

"Similarly, despite recent price cuts for domestic energy, consumers are still faced with increasing spend on household bills as many cuts have yet to filter through to monthly payments. As a result, despite more positive signs for the economy, many households are yet to feel any benefit, although this should change over the coming months."

Following on from Christmas, the proportion of people who say they have no discretionary income once bills and essentials are paid for has increased from 15% to 19%, meaning almost one in five believe they have no discretionary income at all.

Similarly the number of consumers who now feel that money is tight has increased from 40% in December to 43% in January. People aged 35-64 (67%) and those living in the North and Midlands (40%) are most likely to have no discretionary income.

Weak income growth (at 2.6% in January) is still the biggest contributing factor to the squeeze on spending power. Income continues to grow below the rate of inflation, despite recent falls. In January, consumers saw incomes fall by 1.5% in real terms.

At the same time, essential spending also continued to increase and reached another series high in January, with 4.9% annual growth. One of the main contributing factors is the rising cost of utilities. Recent cuts in gas and electricity prices are yet to feed through to reduced spending, which was up 9.3% from the year earlier. Similarly, spending on water bills rose 13.6% in January from the year previous.

Required debt repayments, which include all regular mortgage payments, loans and the minimum payment on credit cards, also increased by 1.1% in January from the year earlier, reversing the previous trend of a decline in this category. This is likely due to a combination of factors including the number of consumers refinancing loans and the impact of increased credit card spending over Christmas.

Regionally, Scotland saw the biggest average increase in essential spending in January, with spending on household bills (+5%) and auto fuel (12%) all rising at a faster rate than the rest of the UK. The North follows behind with household bills up 4% and fuel up 9%. In contrast London has seen the smallest rise in essential spending in these categories: household bills (+3%), and fuel (+6%).

Jatin Patel, director of current accounts for Lloyds TSB, said: "It is worrying that a fifth of consumers currently say that they have no spending power, after they have covered all bills and essential spending. Any further squeeze on their wallets will certainly be felt.

"Although we have seen inflation drop to its lowest level for 14 months, it is clear that this is not yet filtering into consumers’ daily lives. Spending on many items, including utilities, are still rising, and in January were at their highest level for the past 18 months. Encouragingly, consumers are not burying their heads in the sand as many are looking to cut back their spending and pay down their debt, where they can."

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Mike Jones