You are here
UK consumer boom set to flag as Brexit ignites inflation
[LONDON] For UK consumers, the good times might not keep rolling.
Quickening inflation looks set to erode almost two years of real-wage growth, undermining the key driver of the economy. Data due Friday will probably show consumption helped growth accelerate to 0.6 per cent in the second quarter, before the referendum on European Union membership.
Still, there are challenges ahead for households. The pound's 11 per cent drop since the June 23 vote is already pushing up the price of imports and some economists see inflation accelerating above 3 per cent next year, eroding the spending power of British households.
Businesses may already be feeling the Brexit effect, with economists predicting firms scaled back spending last quarter.
Bank of England projections for inflation to reach 1.9 per cent next year leave real-wage growth at about 1 per cent in the fourth quarter of 2017, down from as much as 3.2 per cent last year.
If the more aggressive inflation forecasts of the National Institute of Economic and Social Research prove correct, real pay may turn negative for the first time since 2014.
"Consumer spending and investment are the clear losers" in the post-Brexit environment, said George Buckley, chief UK economist at Deutsche Bank AG in London.
"Higher inflation will erode purchasing power, and if you're worried about your job, the likelihood is that you'll start to save more. Plus there will probably be a rise in unemployment."
While retail sales had their best July for 14 years, official figures may not yet be capturing consumer anxiety, Mr Buckley said.
ONS Chief Economists Joe Grice has cautioned that it's too early to know the precise impact of the referendum on economic activity.
The BOE slashed its 2017 growth forecast to just 0.8 per cent from 2.3 per cent on Aug 4 and predicted unemployment will reach almost 6 per cent by 2018. Officials reduced their benchmark interest rate to 0.25 per cent in August and a majority expect another reduction if the data deteriorates in line with their central forecast.
"The household sector has been holding up pretty well for now," said Chris Hare, an economist at Investec in London.
"There are two things we see happening: businesses will invest less and hire fewer people, which is bad for households, and also higher inflation, given the fall in the pound, will weigh on real take-home pay."