Low inflation: squeeze on household finances ease to a 6 year low

Posted on 26 Apr 2015 by

As April 2015 draws to a close, the squeeze on household finances is approaching a six year low. The main contributing factors to the easing on people’s wallets are thought to be zero inflation and a strong rise in general employment. This means that, in essence, Britons are now enjoying the largest relative increase in their income since the ‘great recession’ of a few years ago; a surefire sign that the country is well on the road to recovery.

Unfortunately though, the added money people are now able to save seems to be going towards paying off debt rather than shopping, holidaying and doing other things to stimulate the economy.  This should change soon however, as income from employment is rising at a rate that hasn’t been seen since 2009 when that kind of data first started to be collected after the big dip.  Spending levels have remained unchanged despite the growth in income due to people paying off their debt; in fact, a survey carried out by Markit in the past week or so found that April had the largest recorded fall in household debt to date. It seems like the austere times of the recession have encouraged people to be more prudent and responsible with their cash flow – not altogether a bad thing.

economic upturn

Further analysis around inflation movements carried out by the EY ITEM Club seemed to suggest that low inflation would  push up the rate of disposable income by the greatest about in two decades this year. Everything about Markit’s research seems to wholeheartedly support this claim too. Inflation was stuck at zero throughout February and March, and many sources indicate that Britain will enter a very short period of deflation later this year. How will that effect wage increases? Markit issued a ‘barometer’ paper which suggested that wage increases for workers in the UK might well remain subdued, especially when it comes to lower paid workers. The average expected pay increase according to their report was around the 1% mark; only 1 in 5 employees will be lucky enough to receive a 2% or more pay rise in 2015.

Another interested thing to come from the same set of data was that those earning £15k/year or less would expect an average pay increase of around 0.5% while those earning more than £57k would enjoy a 1.5% increase. This obviously raises question marks over the sustainability of this fortunate economic upturn. Naturally, we’ll see inflation start to rise by the end of 2015 and there’s a real risk that this growth in the economy could slow if pay growth doesn’t pick up. Watch this space.

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