He commented, ‘ONS data released today shows that household’s disposable income fell by 2% in the first quarter of this year, the fastest fall since 2011.
This was largely due to rising prices, however for the moment households seem unconcerned with the inflationary squeeze that is going on- the ONS reports that consumers’ perception of their own financial situation and of the economy at large improved in the first quarter of this year. The data suggests consumers have noticed rising prices, but are still in positive mood about their financial situation.’
He added, ‘‘The pressure is ratcheting up on UK households, but consumers don’t seem to be fully aware of the crunch that is underway. They have clocked rising prices, but as yet don’t see this has significantly dented their finances. They may well be right, inflation takes time to really bite into household budgets, but the risk is by the time it’s happened, it could be too late to do much about it.
Today’s data from the ONS will concern the Bank of England because despite weak wage growth and rising prices, consumers are continuing to spend by racking up more debt. That of course helps keep the wheels of the economy turning, but stores up problems for the future. Indeed the household savings ratio recently fell to a record low of 1.7 per cent, which means that as a nation we aren’t putting much aside for a rainy day.’
‘Overall today’s figures suggest UK consumers could be sleepwalking into financial difficulties, and will once again raise the question of whether the central bank should increase interest rates. A small rise of 0.25 per cent probably won’t hurt household budgets too much, but might just serve to remind us that rates can go up as well as down.’
Markets were mildly shocked by the most recent meeting of the Bank of England’s Monetary Policy Committee (MPC) voted 5-3 against putting interest rates up. Since that vote, and comments from the central bank’s governor Mark Carney, who voted against putting rates up at the last meeting, that a rate rise could happen soon.
With regard to inflation, the Bank of England’s view is that it will peak later this year and then gradually revert back towards the 2 per cent level. In such a scenario Carney and his colleagues would seek to avoid putting interest rates up.