The pay squeeze continues, but should abate next year

The rise in inflation, primarily driven by sterling’s post-referendum slide, has taken its toll on consumer spending growth this year. However, we think that the worst of the real pay squeeze has probably now passed. With consumer confidence still solid, in part due to the strength of the jobs market, an easing in inflation looks set to translate into decent growth in real consumer spending. Admittedly, our relatively upbeat expectations for the economy point to Bank Rate rising further next year than most expect. But given any rise will be limited by past standards, households’ debt servicing costs should remain manageable and well below pre-crisis norms. Overall, our forecast is for consumer spending growth to stabilise at around 1.8% y/y next year before picking up a bit more pace in 2019 as inflation continues to ease.