UK consumer back in spotlight as wages, inflation diverge

Bloomberg

UK consumers, touted by Mark Carney as a key to the economy’s performance, may find the squeeze on their pockets gets a little tighter this week.
While inflation’s upward momentum probably paused in March, another weakening in wage growth means pay isn’t keeping pace with price increases. That’s all going to feed into household spending habits in 2017.
The inflation and wage numbers reflect the two sides of the debate among Carney, the Bank of England governor, and his fellow policy makers. Consumer-price growth is already above the BOE’s 2 percent target, and Kristin Forbes voted for an interest-rate increase last month because of the view that it will stay there for at least three years. For the majority, however, weak wages mean domestic price pressures aren’t building and there’s no need to rush into tightening.
Carney said last week that the strength of household spending has been one reason for the economy’s growth in the second half of 2016. But, echoing his dovish colleague Gertjan Vlieghe, he also said there have been some signs of a slowdown. Retail sales have plunged in the past three months and consumer confidence has been on a downward trend since early 2016.
“Worrying for UK growth prospects, the fundamentals for consumers look odds-on to weaken markedly further over the coming months as rising inflation eats further into purchasing power,” said Howard Archer, chief UK economist at IHS Markit in London.
The inflation pickup is being fueled by the pound’s decline following the Brexit vote and the effects are being felt by consumers already. A period of food-price deflation has come to an end, and Pernod Ricard SA, whose brands include Absolut vodka and Martell cognac, is raising prices in the UK to offset the depreciation.
The National Institute of Economic and Social Research published its estimate for first-quarter GDP, saying growth probably cooled to 0.5 percent from 0.7 percent in the final three months of 2016. The median forecast of economists surveyed by Bloomberg is for 0.4 percent, with a further weakening to 0.3 percent this quarter. “A key component of this moderation has been relatively weak retail sales in the first two months of this year,” said James Warren, a research fellow at Niesr. “Consumption is expected to moderate further.” Warren expects the doves to continue to hold sway at the BOE for some time. In his view, the central bank will “look through this temporary shock to inflation” and keep loose policy.