The squeeze in real wages looks likely to intensify as as inflation continues to rise to above 3%. However, nominal spending should continue to hold up well, supported by strong employment growth, resilient consumer confidence and low borrowing costs. In any case higher inflation should prove transitory, falling back to 2% by the end of 2018. Indeed, there are already signs that the effect of the weaker pound on retailers costs is starting to wane. As such, while we are forecasting a slowdown in real consumer spending growth, a collapse looks unlikely. Spending growth looks set 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 back up to around 2.0% in 2019 after inflation has fallen back to target.
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