Brexit-fuelled inflation hits British households

Consumer confidence falling and families' spending power weakening, reports show

LONDON • British households are beginning to feel the pain from Brexit-induced pressure on their finances. Multiple reports yesterday showed consumer confidence falling, as well as a weakening of households' spending power.

All of that is likely a reaction to a jump in inflation, which some economists see reaching 3 per cent next year as the pound's post-referendum depreciation feeds into prices.

The reports - from GfK, YouGov and Asda - all cited the sterling as a factor in the changing mood in Britain. The currency has fallen 18 per cent against the US dollar since the June 23 vote, amid investor concern at signs that the government is heading for a so-called hard Brexit, which could reduce access to the European Union's single market.

Britain's economy has performed better than most forecasts indicated since the referendum decision to leave the EU, in large part thanks to strong consumer spending.

But Finance Minister Philip Hammond warned on Thursday that that did not mean the economy would dodge a slowdown next year.

YouGov Reports head Stephen Harmston said: "Consumers pay attention - they know it is likely this situation will only get worse over the next year as Britain starts to negotiate its departure from the EU.

"While in time wages will adjust, at the moment all they are seeing is increased prices squeezing their household finances."

The Asda income tracker, produced by the supermarket chain and the Centre for Economics and Business Research (CEBR), showed British families' discretionary income rose by £9 (S$15) last month from a year ago. That is the first time since October 2014 that consumers have not seen double-digit growth.

CEBR economist Kay Daniel Neufeld said that with inflation picking up, decreases in spending power "cannot be ruled out" next year.

Market research firm GfK said sentiment fell for the first time since the immediate shock of the Brexit vote. Its consumer confidence index dropped to minus 3 this month from minus 1 last month.

"Despite the continuing feel- good factor arising from persistent low interest and inflation rates, the sterling's sharp decline is arguably stoking fears that price rises will hit British living standards hard next year," said GfK analyst Joe Staton.

Consumers' expectations for the economy also declined.

Separately, CEBR said its household sentiment index also fell this month. Excluding an initial post- Brexit slump in July, the gauge is at its lowest since September 2013.

Prices for essentials rose by the largest amount since November 2014 and the cost of imports was likely to increase further because of the weak pound, Asda said.

But a robust job market and relatively low inflation should help spending in the immediate future and GfK noted that households were more willing to make major purchases than a year ago.

BLOOMBERG, REUTERS

A version of this article appeared in the print edition of The Straits Times on October 29, 2016, with the headline 'Brexit-fuelled inflation hits British households'. Print Edition | Subscribe