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Spending power gets a boost from falling inflation

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The nation's wallets got a much needed break last month as spending power saw a small boost off of the back of falling inflation, according to a new report by Lloyds TSB.

Discretionary spending power was 0.7% higher year-on-year last month after inflation, putting the equivalent of an additional £80 a year back into consumers’ wallets, with a cut down on essentials also boosting spending power.

Income growth, although improving, remains weak at 2.8% year-on-year. However, with inflation levels falling in recent months, income growth was positive in real terms in June (0.3%).

At the same time, growth in essential spending, like fuel and debt repayments, has slowed and is at its lowest level so far this year at 3.3%, driven by falling required debt repayments and the slowest growth in automotive fuel spending in over two years.

The number of consumers who have money left over after meeting their essential outgoings has improved year on year (up 6%), but they still only account for half the population.

Patrick Foley, chief economist at Lloyds TSB, says: “Finally consumers are starting to see some of the benefits of lower inflation. It has taken a while but the fall in inflation has fed through to spending on essentials.”

“Although spending power is heading in the right direction it remains far from healthy, in particular because income growth remains weak.” 

“We haven’t seen the unemployment rate react to the apparent weakness in the economy so far, but this remains the biggest risk to spending power in the short term.”

More consumers now believe they have more to spend than this time last year, with a greater proportion saying that they can meet monthly outgoings with money left over; this has increased by 6% over the past year and now stands at 50%.

People aged 35-64 are most likely to spend all of their income which may be perhaps a reflection of the financial demands being placed on them such as a mortgage and older children.



Reduced debt servicing and fuel costs driving essential spending down

Growth in essential spending fell for the third consecutive month in June, and at 3.3%, stood at the lowest it has so far in 2012.

A key driver for this reduction was the amount people are required to pay to service their debts which was 0.6% lower than it was a year ago – consistent with very weak borrowing.

Meanwhile, sentiment towards the country’s financial, employment and housing situation remain similar to previous months and predominantly negative, however there was a downward shift in the number of people believing them to be ‘not at all good’.

Jatin Patel, director of current accounts for Lloyds TSB, said: “We are still a long way from consumers having a huge amount of confidence in the economy, but there are small signs that inflation is one thing they are worrying less about.

“That more people have money left over once they have covered their monthly outgoings is positive, but with many still negative about the outlook for employment, it is unlikely that this will translate into a lot more spending in the high street.”

“It is more likely that we will see people concentrating any spare cash on paying down debts or savings for a rainy day.”

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