Risk of inflation ‘exaggerated’ says economist
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.