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Risk of inflation ‘exaggerated’ says economist

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Written by: Heather Greig-Smith
23/03/2017
The risks to real household spending from rising inflation are grossly overstated, a senior economist has said.

Inflation is expected to average 2.7% in 2017 and 2.6% in 2018, but this will not be enough to deter consumers, said Berenberg senior UK economist Kallum Pickering.

“At this mid-stage of the cycle, growth is entrenched, unemployment low and households feel confident enough to save a little less and borrow a little more.”

He added: “The rise in inflation will squeeze household incomes in 2017 and 2018 even as tight labour market conditions cause a modest rise in nominal wage growth. But it is unlikely to fully pass through into real consumption growth.”

Real household spending growth is likely to ease to a little below the 20-year average rate of 2.4% year on year. Berenberg predicts this will fall from 3.0% in 2016, to 2.3% in 2017 and 1.9% in 2018.

Pickering said household balance sheets have strengthened since the Lehman-crisis, debt-to-income has fallen and household wealth has risen. By increasing borrowing and saving less to target a desired level of consumption, households can smooth spending over the medium-term to compensate for the modest squeezes on real incomes.

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