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Rising bills eat into household spending power

Monday 19th March 2012

Discretionary spending power growth after inflation remained in negative territory in February as consumers continue to suffer from the twin impacts of weak income growth and the rising cost of essentials, according to the latest Spending Power Report from Lloyds TSB.

Spending power, after inflation, was 0.4% lower in February compared to a year earlier, which equates to around £45 less a year available to consumers to spend on non-essential items.

This real terms squeeze in spending power is also reflected in consumers' attitude to their monthly budgets. The number saying they are spending at least three quarters of their income on bills and essentials grew in February, up 3% to 46%, while one in five (19%) consumers also continue to spend all of their income on essentials.

Patrick Foley, chief economist at Lloyds TSB, said: "Despite official figures showing that consumer spending rose in the fourth quarter of 2011, the Spending Power Report shows that households remain under real pressure. Any improvement in this situation will depend on lower inflation on essentials as income growth is likely to remain weak in the short term.

"We would expect households to start seeing the benefit of lower inflation in the next few months, assuming oil prices don't continue to rise sharply, and with it an improvement in consumer sentiment and spending."

Despite official figures showing that inflation is declining, spending on essentials is still heading in the opposite direction, indicating that consumers are not yet feeling the benefit. In February, spending on essentials grew 6% year on year, the fastest rate in almost two years.

The main driver for rising essentials is an increase in spending on utility bills. Spending on water bills was 15.9% higher in February. Whilst price cuts on electricity have yet to filter through to household bills as spending continues to rise; spending in this category was up 10.5% from the year earlier in February, compared to 9.3% growth the previous month. Food and drink spending growth remains increased again at 6.4% in February, compared to 5.3% in January, and spending on automotive fuel continues to grow strongly at 8.9%.

With consumers finding it harder to meet essential costs from weakly growing incomes, some are looking at borrowing as the solution. Consumer research indicates that of the people who report being open to credit, the highest proportion (30%) are those who state that they don't have enough money to meet monthly outgoings.

Income growth has been anaemic for some time, hovering around the 3% mark for the past eight months. However, the recent drop in inflation levels means that real terms incomes are not falling as fast as they were.

Incomes in February were 3% higher than a year ago, but after inflation they fell 0.5% year on year in February, up from a 1.3% fall in January and the least weak they have been since June last year. This has led to the small improvement in the squeeze on spending power last month.

Consumers' sentiment towards the country's financial situation, housing market and inflation have all either stabilised or improved (from a very pessimistic level) in recent months, those feeling negative about each of these were 91%, 80% and 79% respectively (as opposed to 91%, 81% and 84% in January).

However, in contrast negativity around employment has been trending upwards over the past three months and remained at 93% of all respondents in February. Compared with a year ago, extreme pessimism with regards to the employment situation in the country remains significantly higher (56% in February 2012 compared to 47% the year previous) while that for inflation remains lower (27% in February 2012 compared to 36% in March 2011).

Jatin Patel, director of current accounts for Lloyds TSB, said: "The number of consumers who are spending the majority of their income on essential items has risen again in February, and with spending on essentials at its highest point in this series, it is no surprise. Whilst we are starting to see more positive news around inflation and cuts in household energy bills, the reality is that a lot of people still seem to be struggling to pay their bills."

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Mike Jones

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