Coping with higher inflation

Growth in household spending is likely to slow over the next few years as inflation rises and dampens growth in real incomes. But loose credit conditions and relatively upbeat sentiment by past standards should ensure that spending does not slow too dramatically. Admittedly, this strength will probably not last. After all, while wage growth has been picking up, inflation is on the rise too. Indeed, CPI inflation looks set to reach about 3% by the end of 2017 and, as a result, we should start to see fairly muted growth in households’ real incomes. Meanwhile, although overall spending has remained resilient, rising inflation already appears to have hit the growth in purchases of items with fast pass-through from the exchange rate into prices – including food and petrol.