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Fall in inflation eases the squeeze, but consumer caution prevails

30 July 2012

  • Lowest inflation in two years relieves the drag on consumer spending power;
  • Salary growth expected to outpace inflation for the first time in five years;
  • But, consumer confidence remains fragile with ongoing concerns over disposable income.

The number of consumers expecting to spend more on essential items is falling sharply, according to Deloitte’s latest Consumer Tracker.  As lower inflation begins to have a direct impact on the cash in consumer pockets, on average just 13% say they anticipate spending more on essential categories* such as housing, transport, groceries and utilities over the next three months, whilst 12% say they will spend less.  This compares with on average 19% saying they’ll spend more and 10% saying they’ll spend less when asked three months ago.  

Pressure to increase spending on food has eased in tandem with the decline in food price inflation.  The proportion of consumers who expect to spend more on groceries has dropped from 29% in the first quarter to 21% in the latest survey.  The same trend can be seen in utility bills (32% vs. 24%) and housing (17% vs. 12%).

Ian Stewart, chief economist at Deloitte, explains: “There are signs that the squeeze on the UK consumer is easing.  Inflation has fallen significantly over the last six months, down from 3.6% in January to 2.4% in June, its lowest level in two years.  As inflation falls, so the drag on spending power drops away, resulting in a real income rise for consumers.  As a result, we are seeing more optimism about spending on discretionary items.  Lower inflation enables consumers to shift spending away from the essentials such as food and utilities towards more discretionary areas, including eating out, clothing and footwear, where spending has been under real pressure in recent years.  For most of the past five years, inflation has run ahead of the growth of consumer earnings.  Over the next year we are likely to see that trend reverse, giving consumer spending power a much-needed boost.”

Whilst the pressure is easing, consumer confidence remains fragile due to ongoing concerns about the health of the economy.  When compared to the previous quarter, more people are pessimistic about their personal debt (27% vs. 22%) and job security (20% vs. 18%).  As such, whilst consumers recognise there is less pressure on non-discretionary spend, they are not quite ready yet to open their wallets to spend big on discretionary items.  In particular, consumers say they will still be holding back from spending more on the big ticket items, such as holidays (16% over the next three months vs. 14% this quarter), going out (unchanged at 8%) and white goods (unchanged at 6%).

Trading down (28%), planning their spending (22%) and keeping impulse purchases in check (25%) continue to be the preferred methods for those consumers who reported spending less this quarter to manage their outgoings.  These same consumers are increasingly bargain hunting (20%) and taking advantage of sales and special offers in order to make savings (11%).

Nigel Wixcey, UK head of consumer business at Deloitte: “Despite ongoing concerns over the economy there is a glimmer of light for the consumer.  The Tracker shows optimism has increased over the last three months and that this is expected to continue, though at a very slow pace.  Ironically, the unseasonal weather patterns experienced across the UK have forced retailers to heavily discount summer stock early providing consumers with an unlikely boost.”

Ends

Notes to Editors:
* The full list of essential categories includes: utility bills; grocery shopping for food and non-alcoholic beverages; housing; landline/mobile telephone, internet and cable/TV subscriptions; pensions and insurance; health; and, education.  

About Deloitte
In this press release references to Deloitte are references to Deloitte LLP, which is among the country's leading professional services firms.

Deloitte LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu Limited (“DTTL”), a UK private company limited by guarantee, whose member firms are legally separate and independent entities. Please see www.deloitte.co.uk/about for a detailed description of the legal structure of DTTL and its member firms.

The information contained in this press release is correct at the time of going to press.

Member of Deloitte Touche Tohmatsu Limited

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