Consumers will be better off at end of 2012

The pressure on consumer finances could be set to ease over the next few months, a new report has suggested.

According to the Ernst & Young ITEM Club, people in the UK have recently been experiencing the tightest squeeze on their incomes in a generation.

However, senior economic adviser Andrew Goodwin believes "the worst is now behind us" and that the next few months could see conditions start to improve.

Estimates from the organisation suggest that inflation will start to head back towards two per cent before the end of 2012, which would put it more closely in line with the government's target.

While this will partly depend on factors such as oil price movements in the coming months, the Ernst & Young ITEM Club is confident this could mean wage growth will soon begin to exceed inflation.

The group also believes the increase in the personal tax allowance that was announced by the Chancellor of the Exchequer in his Budget earlier this year could have a positive effect on people's finances.

Indeed, the Ernst & Young ITEM Club stressed it is only those who are not liable for income tax, as well as individuals who earn more than £36,000 per annum, that will not directly benefit from this move. As a result, the organisation expects the income of the average person to increase by £482 in 2012, while they could get an extra £624 in their take home pay in 2013.

"Most people should start to feel a bit better off by the end of the year," Mr Goodwin commented.

However, the Ernst & Young ITEM Club does not believe this development will bring about a significant upturn in consumer spending in the near future. The group said people will use much of the extra cash they have to pay down debt, which means consumer spending will only increase by 0.8 per cent in 2012 and by 1.1 per cent in 2013. Therefore, it is unlikely to return to the level seen prior to the recession until 2015 at the earliest.

"Rather than splashing their cash, we're expecting to see conscientious consumers keeping a relatively firm grip on their purse strings," Mr Goodwin stated.

He also stressed that the economic slump is not over yet and that international events could have an impact on the UK during the next few months.

"We still need to keep our fingers tightly crossed," said Mr Goodwin.

"The eurozone crisis continues to cast a long shadow and consumer confidence could easily take another hit if the situation worsens, particularly if unemployment nudges up."

Nevertheless, the Ernst & Young ITEM Club said that while the last five years have been "torrid" for consumers in the UK, there is now "light at the end of the tunnel".

This comes after IHS Global Insight warned that the UK's slip back into recession, as well as concern over how financial turmoil in Greece will affect the British economy, has dented consumer confidence in the country.

Howard Archer, chief economist at the group, believes people will be "generally cautious" in their spending throughout the coming months, as they are facing "worrying and uncertain times".

He added that Britons are still experiencing a squeeze on their spending power, since consumer price inflation is "still well above annual earnings growth", despite a drop during April.

By James Francis