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Rising inflation and weaker pound sounds warning for consumer spending

Analysts have warned that consumers are likely to see disposable income dip until 2020, as the UK’s inflation rate has continued to climb since June’s EU referendum.

The Consumer Price Index measure of inflation reached 1.6% in December, below the Bank of England’s target rate of 2%, but its highest level in 29 months.

Mark Carney, the governor of the Bank of England, warned that consumer spending could be hit by rising prices due to the weaker pound. He also sounded a warning about the growth in household debt. In 2016, total household borrowing had risen 4% while consumer credit had gone up by more than 10%, which he said was “the fastest rate since 2005”.

Carney believes the UK is entering a period of higher consumer price inflation. The BoE’s monetary policy committee has forecast inflation reaching 2.7% by 2018. The National Institute for Economic and Social Research suggested it could hit 4%.

This could lead to an increase in the BoE’s base interest rate, currently 0.25%, which could lead to motor finance becoming more expensive. This would follow VED changes in April that will make some new cars less financially attractive.

The credit rating agency Moody’s estimated that a 5% cumulative increase in inflation could lead to a 6.9% increase in defaults on car loans, according to reports in The Financial Times.

 

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