The price we pay for goods has raced ahead of the Bank of England’s target, with inflation hitting a four-year high of 2.7% in April. This is higher than many pundits had expected, but it’s also no surprise.
Whilst prices are increasing, wages haven’t kept up. Real income growth dropped for the first time in nearly three years over the first quarter of 2017¹. Wages increased 2.1% without adjusting for inflation.
With wages failing to keep up with increasing prices, Brits must be feeling the pinch. What’s surprising to me is that shoppers are refusing to ease off on their spending.
Bouncing back from a weaker March, sales volumes jumped 2.3% in April, as warmer weather lured shoppers out of hibernation. This extends the momentum seen last year, which saw consumer spending rise 3.7% to £1.2 trillion².
April’s inflation increase is partly down to a rise in airline prices as families rushed to get away over Easter, unfortunately there was no such escape in my household, something I’m yet to hear the end of. That wasn’t the only culprit, however; electricity and gas prices were up and the impact of the weaker pound started to feed into retail prices.
Inflation used to be directed by the oil price, but sterling has started taking over that role. The pound is also why the Bank of England decided to keep rates at 0.25% at the last Monetary Policy Committee, despite inflation running above their 2% target.
Flash the plastic
Shoppers just aren’t being put off flashing their plastic, even if concerns over the cost of food and impact of Brexit are growing. A new report from market research group Mintel shows that all consumers are getting nervous, regardless of household income.
What’s worrying is that Brits are increasingly eating into their savings or even borrowing to spend more².
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That this isn’t sustainable isn’t a new argument, but borrowing looks attractive right now with interest rates so low. It comes with a caution though; a rise in rates could hurt households – especially those who, tipsy on cheap borrowing, forgot to prepare for tougher times.
Whilst avoiding fun yet unaffordable shopping sprees in favour of saving a little more each month won’t have the conversational prowess at a dinner party as some new tech or a holiday. It is, however, sensible, and can help avoid painful circumstances down the line – and if conversation naturally gravitates to savings, you can smugly confess in your ability to prioritise.
Although low interest rates equal cheap borrowing, it also means it makes less financial sense to keep your savings in cash.
Low returns from Cash ISAs and high inflation means your cash will lose ‘real’ value in the future. Instead, savers can make their money work harder for them by investing in a stocks and shares ISA, maximising their returns within their tax-efficient wrapper.
After all, life is about balance. Treat yourself today, but remember to treat the future you too. Putting a little bit more aside each month could avoid any painful periods in the future when rates go up, prices climb higher and/or wage growth continues to fall.
1Office for National Statistics
2 British shoppers remain confident in their household finances, Financial Times, May 2017