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Inflation squeeze dents confidence

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Slow wage growth and higher inflation is knocking people’s confidence in their personal finances, according to the latest Lloyds Bank Spending Power Report.

The Lloyds Bank Report, in combination with Ipsos Mori, found that two-thirds of people (65%) still feel positive about their personal financial situation, but this is 2% lower than in May, and 5% lower than the 12-month high of 68% seen in March.

CPI inflation continues to rise, jumping from 2.7% in April to 2.9% in May. The Report showed 62% now feel pessimistic about inflation, up from 59% in April.

This was seen in how people are spending their money: expenditure on food and drink, which accounts for around 40% of all essential spend, rose by around 2.5% on a year ago compared to a growth rate of around 3% in April. Spending on petrol and diesel increased by around 10% year-on-year, a lower rise than the growth rate of around 13% seen in April.

The proportion of people who say they had money left over at the end of the month after they have covered all outgoings fell from 84% in April to 80% in May. Meanwhile the proportion of consumers describing their household’s financial situation as comfortable also fell, from 62% in April to 60% in May.

This is also having an impact on savings rates. New figures from the Office for National Statistics show that the UK’s household savings ratio has hit an all-time low of 1.7%.

Tom McPhail, head of policy at Hargreaves Lansdown, said: “This data is likely to set alarm bells ringing…The fall in the household savings ratio is undoubtedly in large part due to the squeeze on disposable income caused by a combination of flat average earnings and rising prices. Savings rates tend to fall when the economy prospers and to rise in times of recession and uncertainty, as households cut back on consumption to buy a rainy-day reserve.” He points out that only 30% of the working age population have savings of three months’ income or more.

Robin Bulloch, managing director, Lloyds Bank, said: “Inflation continues to be front of mind when people consider the health of their personal finances. With consumers now reporting a significant impact on their disposable income, there’s simply less money left over each month for buying the occasional treat. And while recent falls in forecourt petrol prices may provide some relief, it’s the rising cost of food and drink which continues to really stretch the purse strings. With little change in these broad trends likely in the short-term, households should prepare for a further squeeze on their spending power in the months ahead.”

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