Spending holding up well despite real pay squeeze

There have been some tentative signs that the tight labour market is translating into stronger pay gains. Even so, earnings growth needs to gather more pace in order to match the rise in CPI inflation – which we expect to peak at about 3% later this year. As such, there is likely to be little let up for consumers’ squeezed finances anytime soon. But for now at least, spending on the high street still seems to be growing at a reasonable pace. And as the inflationary effect of sterling’s fall dwindles from next year, there should be scope for spending growth to regain some vigour. Overall, we expect spending growth to slow to about 2.0% this year and 1.5% in 2018, down from 2.8% in 2016. But it should then re-accelerate to around 2.0% in 2019 after inflation has fallen back to its target.