‘Squeeze on consumer spending may be ending’

After more than four years of watching their spending power eroded by rising prices, British households look set to enjoy a rise in real wages, according to a Bank of England policymaker.

Ben Broadbent was upbeat on consumer spending in 2014. Picture: Reuters

Ben Broadbent, a member of the Bank’s rate-setting monetary policy committee, said yesterday that the squeeze on consumers’ pockets could be coming to an end thanks to a combination of improving profits among employers and slowing inflation.

Addressing an audience at the London School of Economics, Broadbent said: “Real GDP is now 6 per cent higher than at its cyclical trough in mid-2009. Yet, deflated by consumer prices, average earnings have fallen by over 4 per cent.”

Figures released by the Office for National Statistics (ONS) earlier this week showed that consumer price inflation fell back to the Bank’s 2 per cent target for the first time in four years, thanks to lower prices for food and computer games, taking the pressure of Bank governor Mark Carney to consider an early hike in interest rates.

The UK economy is also on track to expand by 1.9 per cent this year, according to the National Institute of Economic & Social Research (NIESR) – faster than the 1.6 per cent forecast by the Bank and well above last year’s growth of 0.3 per cent.

As the economic turnaround continues, Broadbent said it was “reasonable to expect some recovery in profit margins which, all else equal, would limit real wage growth”.

But he added: “It seems to me highly unlikely we’ll see anything like the relative price headwinds of the past four years. If anything, given the longer-term trends in the UK’s terms of trade, a move back in the opposite direction is a more likely prospect. That would clearly benefit the purchasing power of UK income, wages included, supporting the real growth of consumption.”

The ONS will publish its first estimate of GDP for the final three months of 2013 on 28 January. The NIESR expects the quarterly rate of growth to have eased to 0.7 per cent, down from 0.8 per cent in the previous three-month period.