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Economists question how long it will be before inflation hits consumer spending

The shops in Birmingham’s city centre are pumping out Christmas songs, but the mood among some of the shoppers on a cold December morning does not quite match the festive music.

“This year I’ve done most of my shopping earlier to make use of Black Friday deals, and I have been looking out for sales and reductions,” says Claire Hughes, 41, referring to how UK retailers have adopted the tactic of offering big discounts on their goods on the Friday after the US Thanksgiving holiday in late November.

Ann Morris, 55, says buying presents for her family has been more of a challenge this year. “I have noticed things getting more expensive and buying presents for my children is costing more,” she adds.

These experiences highlight the impact of the 2017 squeeze on household incomes as inflation has jumped — in November the consumer price index was 3.1 per cent higher than a year earlier — while wages have grown more slowly. With household finances under pressure, economists are wondering whether consumers can keep propping up the UK economy, as they have done since the EU referendum in June last year.

Policymakers have learnt not to write off the British consumer. Incorrect forecasts of economic stagnation after the Brexit vote were based on the idea that households would tighten their belts in the face of uncertainty, but the opposite happened. While consumer spending accounts for 63 per cent of the UK economy, it has been responsible for 73 per cent of growth post the referendum.

Canny shopper Claire Hughes snapped up early Christmas bargains in the Black Friday sales © Andrew Fox/FT

The latest official data for retail sales was surprisingly strong. The volume of goods bought rose 1.6 per cent in November compared to a year earlier.

Off the high street — where consumers spend two-thirds of their money — the signs are more mixed. While spending growth in restaurants and on leisure pursuits has been strong, large purchases such as cars are faltering, with vehicle sales in the first 11 months of 2017 down 5 per cent compared with the same period last year. Consumer confidence has been on a downward trajectory.

Economists say that consumers cannot always be the engine of growth, and this is leading some to worry that this Christmas might be a disappointing one for high street retailers, with little improvement next year.

Andrew Sentance, economic adviser at PwC, says: “Consumers still face a significant headwind from the fact that wages are growing more slowly than prices. That squeeze on real incomes will continue to act as a dampening influence on consumer spending in the first half of next year.”

In Birmingham’s Frankfurt Christmas market — which sells authentic German gifts and food — Jag Singh, 42, is shopping for his children’s presents. He says he is “having to spend more” to get them the things they want.

This attitude of spending as much as possible, in spite of the squeeze on household incomes, is also visible in the most recent retail sales data from the Office for National Statistics. The volume of electrical appliances bought rose 6.8 per cent in November compared to a year earlier, said the UK statistical agency.

The ONS figures exceeded many economists’ expectations, but also led some to question whether Black Friday discounts are now enticing people to change their spending habits and bring more of a boost to retailers in November than in the weeks before Christmas and the January sales.

Jag Singh says he is having to spend more to get his children the things they want © Andrew Fox

Visa, the operator of debit and credit cards, also reported a bounce in November spending compared with October. But it said the total volume of spending was down 0.9 per cent last month compared with a year earlier.

Annabel Fiddes, economist at IHS Markit, which produces the figures for Visa, accepts the data are difficult to produce at this time of the year when new consumer spending patterns are emerging.

“What we’re seeing in the Visa data are a shift and people are bringing forward spending into November, so we could see a weaker December,” she says. With it taking time to untangle these knotty questions, the strength of Christmas spending will not really be known until late February.

Derek Thomas, 52, seems unfazed by the squeeze on household incomes as he makes his way out of Grand Central, a new shopping plaza built around Birmingham’s largest railway station which recently had a £600m revamp.

“Christmas costs a lot every year,” he says. “I can’t say I’ve particularly noticed a price rise this time round.”

The big question for the UK economy in 2018 is whether Derek and Jag, who are keeping spending in spite of higher prices, are more representative of the British consumer than Ann and Claire, who have been tightening their belts.

Their contrasting attitudes will inform the UK savings ratio, or the proportion of incomes that is not spent. On a cash basis, households saved only 1.1 per cent of their incomes in the second quarter of 2017, the most recent period for which data are available, compared to 3.7 per cent a year earlier, just before the EU referendum, according to the ONS.

If savings rise, the economy is likely to be sickly in 2018 because consumers will no longer be providing the spending boost they have in the past year. But if households remain comfortable with low savings, and there is an improvement in incomes growth, the economic outlook should pick up.