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Family spending power remains low as inflation outstrips earnings growth

2.5 per cent year on year decrease in discretionary income of average UK household

GENERAL MERCHANDISE

Family spending power remains low as inflation outstrips earnings growth

2.5 per cent year on year decrease in discretionary income of average UK household

There was a year-on-year decline in the Asda income tracker of 2.5 per cent in July 2010. This represents a £5 a week decrease in family spending power compared with the same month in 2009.

The average family had £175 per week to spend in July, down from £180 this time last year. An increase in price inflation was the single largest contributor, while annual growth in regular earnings eased over the three months to June to 1.6 per cent, from 1.8 percent in the three months to May. The cost of living continues to rise at an elevated pace. Despite easing slightly, it remained above the Bank of England’s target range at 3.1 per cent in July. The Bank of England’s August Inflation Report suggests that consumer inflation will remain close to 3.0 per cent for the remainder of 2010 and above 2.0 per cent through 2011.

Earnings growth during 2010 has been particularly weak, increasing on average by just 1.7 per cent, excluding bonuses. When bonuses are included, family spending has decreased by £4 over the year to July.  Claimant count unemployment fell by 3,800 in July 2010 compared to June 2010. This was significantly below expectations of an 18,000 decrease, and below the downwardly revised decrease of 15,900 in June. Although claimant count unemployment has fallen by 12,000 since July 2009, the rate of decrease has eased substantially.

The main factors putting downward pressure on family spending power in July included food and non-alcoholic drinks, which contributed 0.4 percentage points to the overall inflation rate. The most significant factor came from fuels and lubricants as prices rose 14.3 per cent over the twelve months to July. Price inflation and transport contributed 1.3 percentage points of the 3.1 per cent overall inflation rate. With 5.2 per cent annual growth, mortgage costs have continued to edge up in July - the fourth month in a row that mortgage costs have been higher than the previous year.

The only area of spending which has helped with household’s discretionary income was clothing and footwear, which decreased 3.1 per cent over the year to July, compared to 1.4 per cent in June. While electricity, gas and other fuels were 1.9 per cent down over the year to July, other housing costs rose robustly over the same period.

Charles Davis, the economist at Cebr who compiles the report for Asda, said: “While inflation slipped in July, so did growth in average earnings. The Bank of England suggests that inflation will remain close to 3.0% for the remainder of 2010 and above 2.0% trough 2011. This is going to occur within the context of a weak labour market and looming public sector job cuts. As such, the outlook for earnings growth is poor and it is unlikely to keep up with growth in the price of essential goods and services. The combined impact? Reductions in family spending power into 2011”
Andy Clarke, Asda president and CEO, added  "The latest figures back up what we forecasted last week, these are increasingly uncertain times for millions of families across the UK and our customers will need us more than ever. “We’re shopkeepers not economists, but in this ‘age of austerity’ we know the pennywise will thrive. Our stimulus package for the economy starts with saving our customers money every time they shop –real money that can be saved, or spent elsewhere."

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