Inflation ‘holds key to spending power’

The level of inflation will hold the key to whether consumers start to feel better off after the Budget, Lloyds TSB has said.

Following the speech yesterday (March 21st) by chancellor George Osborne, chief economist at the Bank Patrick Foley said the "majority" of consumers will be set to benefit most from the raising of personal tax allowances, which may be "significant" in their impact as the government estimates this will provide an average benefit of £170 after inflation.

However, he noted, the £1,100 increase will not kick in until April 2013 (although the allowance will rise by £630 next month) and he suggested the issue of inflation will itself be crucial to how people feel about their finances.

"With the economy and income growth set to remain weak in 2012, any improvement will depend on lower inflation feeding through to lower spending on essentials – something that the 3p increase in fuel duty set for August will not help," Mr Foley remarked.

For consumers who have debt management concerns, this may provide another reason to seek help as incomes continue being squeezed, even if inflation is not quite so high as last year.

According to Lloyds TSB's Spending Power report in February this year the typical consumer had £45 less to spend on non-essential items than a year earlier – a fall of 0.4 per cent in real terms, while spending on essentials was growing at its fastest rate in two years, up six per cent year-on-year.

The survey found that 46 per cent of consumers are now spending at least three-quarters of their income on essentials, three per cent more than in February 2011.

During his Budget speech, Mr Osborne said that the increase in personal allowances to £9,205 would mean that somebody working full-time on the minimum wage would see their tax bill halved from what it was when the coalition government took office.

By James Francis