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Consumer confidence rises but squeeze could be on the way

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31/05/2017
Consumer confidence increased in May despite rising inflation and a slowdown in wage growth.

The GfK Consumer Confidence Index rose two points to minus 5 this month, with consumers reporting increased confidence in their personal finance situation, the wider economy and plans for shopping and saving.

This figure is relatively robust by historical standards. It compares to a long run average of minus 7, a post Brexit July 2016 reading of minus 12, and a minimum reading of minus 39 in July 2008.

Joe Staton, head of market dynamics at GfK, said: “Despite life becoming more expensive with inflation hitting its highest level in four years, and wages dropping in real terms for the first time in three years, stagnant living standards haven’t yet significantly dented consumers’ spirits – when it comes to retail therapy we remain happy to splash the cash as sales jump ahead of expectations.

“Although the Overall Index Score is bumping along in negative territory, we haven’t seen any significant fall of the kind we might expect during such periods of pre-election and pre-Brexit uncertainty.”

However, if inflation, which hit 2.7% in April, continues to increase, and wage growth remains weak, a squeeze in living standards may be on its way.

Laith Khalaf, senior analyst at Hargreaves Lansdown, said: “UK consumers continue to confound expectations with their optimism, though the inflationary squeeze on household incomes is only just starting to bite. If wage growth remains anaemic, we can expect consumers to feel the pinch in the coming year as weaker sterling and higher energy costs feed through into monthly budgets.

“The one saving grace for UK consumers is mortgage interest rates are still at extremely low levels, highlighting the bind that the Bank of England finds itself in. Despite rising inflation it’s really in no position to raise interest rates anytime soon without damaging the engine of the British economy. Consequently we can still expect UK interest rates to remain low for some considerable time yet.”

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