Spending power flat as incomes struggle to keep pace with cost of living

Continuing the trend seen through much of 2012, the year ended with income struggling to keep pace with inflation through December.  Therefore, consumers are still waiting for the effects of lower inflation to feed through into household budgets by way of any significant boost to discretionary spending power.

For the month of December, the Lloyds TSB Spending Power Report shows that consumers were no better off than at the same time in 2011 as subdued growth in income (2.9%) continues to be dampened by the effects of inflation and the rising cost of essential items.

Spending on essential items ticked up gently to 3.0% from 2.7% in November, driven partly by greater spending on water bills (5.8%), automotive fuel (1.3%) and debt payments (0.4%) compared with December 2011.  While there was an increase in spending growth on food and drink - the largest and most influential component within the essential spending category - at 3.4% year-on-year, this growth is perhaps lower than could be expected against a backdrop of concerns around rising food and drink prices.  This may illustrate that people are taking a more cautious approach to food and drink spending in light of price increases, or a sign that more consumers are choosing to move to less expensive items to fill their pantry.

Spending growth on gas and electricity bills continues to fall month-on-month.  However, as UK energy suppliers begin to introduce pre-announced price increases for customers, we are likely to see this feed into the index in the months ahead, pushing the growth figure up from its current relatively low level of 3.7%.

Patrick Foley, chief economist at Lloyds TSB, says: "Spending power has remained broadly flat in real terms for the last six months as inflation has remained uncomfortably high. With little prospect of inflation falling back any time soon and income growth remaining anaemic, consumers are going to continue to feel the squeeze at the start of 2013. Looking ahead, we expect the economy to build some momentum which should translate into improving incomes and some much needed breathing room for household finances."

Current situation

There has been little change in overall perceptions of the country's current economic situation with a majority (91%) still feeling that the situation is either ‘not good' or ‘not at all good'.  However, within this, there has been a slow increase in the number of consumers stating the situation is ‘not at all good', from 42% in August to 46% in December.  Over half (53%) of people aged 45 or over rate the country's economic situation as ‘not at all' good, compared with 39% of 18-34 year olds.

At 48%, just under half of people state that their personal financial situation is either ‘not good' or ‘not at all good'.  This compares with 52% in November and is the lowest level this measure has reached since May 2012.  Regionally it is those based in the North East, Yorkshire or Humberside and Wales who are the most pessimistic about their own situation, with the East and West Midlands the most positive.

Views on the UK's employment situation have deteriorated for the second consecutive month with those stating that the situation is ‘not good' or ‘not at all good' increasing by one percentage point to 88%.  This follows a period of positive movement in this measure, from 93% to 85%, between January and October 2011.  Only 1% viewed the UK's employment situation as ‘excellent' or ‘very good' in December.

Future situation

Attitudes towards future discretionary income worsened slightly in December with the balance of opinion (the difference between those saying they will have more minus those saying they will have less in six months time) falling to -8% from -7% in November.  As seen in previous months, the younger generation are far more optimistic about the future with nearly two fifths of 18-24 year olds stating that they see themselves as having ‘more' or ‘much more' money in six months' time.

Similarly, the balance of opinion with regard to saving (the difference between those saying they will save more minus those saying they will save less) decreased by one percentage point to 1% in December, with 21% saying they will be able to save less in six months' time compared to 22% who believe they will save more.