Inflation and income prospects to remain gloomy?

The latest inflation figures appear at first glance to have brought some good news. The consumer prices index (CPI) rate dropped from 2.6 per cent to 2.5 per cent last month, while the retail price figure dipped from 3.2 per cent to 2.9 per cent.

Furthermore, the longer-term trend looks good as well. Last year inflation was persistently high, with CPI spending several months over four per cent and climbing as high as 5.2 per cent in September 2011.

Since then, however, the rate has plunged, with month-on-month falls on all but two occasions since then. On the face of it, this would appear to be good news for consumers with tight budgets and debt issues to tackle. But all may not be so simple.

Firstly, while the cost of living is not rising as fast as it was, the growth of pay has been very slow, consistently lagging behind prices.

This issue was raised in response to the latest figures by Trades Union Congress general secretary Brendan Barber.

He said: "Inflation is not falling fast enough, particularly as wage growth is so anaemic.

"Real wages have been shrinking for nearly four years now and the prospect of an ease in living standards any time soon looks remote."

For many consumers, this has been particularly bad news. In the first instance, it has reduced their spending power. But for those in debt, the concerns have been more acute as the issue has then arisen about whether some can maintain their repayments while their car fuel, home energy and food bills are soaring.

Secondly, the squeeze on consumers and its impact on their spending power does not just mean people are directly worse off.

It also means there is a knock-on effect as lower consumer spending slows down the economy, contributing to the continuing shrinking of the economy and therefore the risk of job losses, which could leave those becoming unemployed in greater trouble as they lose the means to maintain debt repayments.

The latest evidence of trailing wage settlements comes from two recent releases by the Office for National Statistics (ONS).

While the latest employment data has shown another welcome fall in employment, the total year-on-year pay increase was only 1.5 per cent (excluding bonuses) in the three months to July, down by 0.3 per cent on the three months to June. Falling inflation may be having the effect of pushing wage rises down.

Furthermore, the trend over the past couple of years has been for the level of disposable income to fall in real terms. The ONS Measuring Well Being – Personal Finance Report by Revealed the average household income after housing costs is now £359 a week, compared with £373 a week in 2009-10.

Another concern for indebted consumers is that the slowdown in the rate of inflation may be losing momentum. This was hinted at by the latest Bank of England Monetary Policy Committee (MPC) minutes, reflecting on this month's meeting.

It noted the CPI rate was now less likely to reach the two per cent target by the end of the year than had previously been expected. Reasons for this included expected increases in the cost of motoring fuel, domestic fuel and some foods.

These have all been among the costs that have increased significantly for consumers in recent years. If they do so again, the swift downward trend in inflation could grind to a halt, making life harder still for those in debt.

Posted by Paul Thacker