Divergence between wages and inflation puts focus on UK consumers 11 April 2017
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Divergence between wages and inflation puts focus on UK consumers 11 April 2017

Inflation boosted by the pound’s decline could put pressure on UK consumers. At the same time, slowing wage growth could exacerbate the impact of this inflation, squeezing a group that the Bank of England (BoE)’s governor, Mark Carney, regards as “key” to the UK economy.

According to the Visa Index, published on Monday, this is already causing a slowdown in consumer expenditure that was visible in the first quarter of the year:

UK consumer spending slows down in Q1

uk cons spend gph

SOURCE: Bloomberg

The pound’s loss of value is directly attributable to the UK’s decision to leave the European Union – which was irrevocably set in motion at the end of March. Another weakening in wage growth will see pay fail to keep pace with the inflation this causes, squeezing consumers at both ends. According to the Visa Index, growth was slowest during the first quarter in more than three years.

inflation gph

According to Howard Archer, chief UK economist for HIS Markit in London:

“Worrying for UK growth prospects, the fundamentals for consumers look odds-on to weaken markedly further over the coming months as rising inflation eats further into purchasing power.”

Disclosure

The opinions in this article do not reflect those of Dominion Fund Management Limited, and in the instance of any forward-looking statements, these should not be construed as advice.


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