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Deflation boosts household spending - report

Visa Europe | Visa

3 min read Partner content

Households are reaping the benefits of deflation coupled with rising pay packets, as indicators suggest consumer spending is continuing to rise.

The latest UK Expenditure Index, compiled by Visa Europe, shows a 2.2% upsurge in spending figures for May compared to the previous year, the fastest annual rise in expenditure since July 2014.

Figures also showed the UK has experienced its strongest three month average rise in household spending since January 2008, with 2.2% growth between March and May this year.

The boost was driven by the hospitality sector, with Hotels, Restaurants & Bars reporting a 10.3% rise on the year.

The Recreation & Culture industry also performed strongly, seeing a 3.9% increase in spending over the same period.

Of the eight categories that were included, five showed improvement, however Clothing and Footwear suffered a fall on the year of -1.8%, marking a sixth month of contraction for the sector.

Spending too fell sharply in health and education, with a 5.9% decrease over the same period, despite a modest rise of 2.2% seen in April.

Paul Smith, Senior Economist at Markit, said the data signalled the UK's spending growth had “moved up a gear”.

“Driven by a combination of merchant discounting, rising real wages and increased confidence in the wider macro-economic environment, underlying consumer spending growth was the best seen for over seven years. These numbers suggest that the UK economy is firmly on course to enjoy a strong pick-up in GDP growth for Q2 2015,” he added.

Conservative MP Gareth Johnson, who is a vice-chair of parliament’s all party retail group, cautiously welcomed the figures, saying they “give a clear indication that the economic recovery is well underway.  Rising wages and falling prices are leading to an increase in disposable income.”

“Shopping centres like Bluewater in my constituency provide a vital role in the local economy and jobs market. Whilst we should be cautiously optimistic with these results, any increase in retail spending should be welcomed for the positive impact it will have for the local and national economy. The economy is not out of the woods yet but these figures show that confidence amongst shoppers is continuing to rise.”

Visa Europe’s UK & Ireland Managing Director, Kevin Jenkins, said the figures reflected the “benefits of deflation coupled with a pick-up in real wage growth”.

“As the costs of essentials fell, UK consumers indulged themselves on things they enjoy. The two May Bank Holidays combined with the half-term break saw people spend more on going away, dining out and entertainment.

“With more money in their pocket and a spring in their step, consumers look set to continue their spending momentum into the second half of the year,” he added.

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