Inflation’s hold on the U.K. consumer is tightening and the economy is suffering as a result.
Consumer spending fell an annual 0.8 percent in May, the first decline since September 2013, according to IHS Markit and Visa. Separately, accountancy firm BDO said its U.K. business activity index weakened as services, the largest part of the economy, ground to a halt. Citing the impact of the weaker pound, it said services companies are seeing no growth in demand.
The latest numbers highlight the economic challenge facing Prime Minister Theresa May, who reshuffled some ministers at the weekend after an election that saw her lose her Parliament majority. The vote, which forced May into an alliance to keep power, adds to uncertainty just as the government is about to begin talks on its exit from the European Union.
“The services sector is definitely slowing down, with many blaming this on the snap election,” said Peter Hemington, partner at BDO. “But the downward trend is clearly much more deeply rooted than this. Surprisingly, U.K. businesses remain optimistic about the future, but an immediate recovery seems unlikely.”
The Visa report tallies with numbers from the Confederation of British Industry, which showed a drop in retail demand last month after an Easter-related surge in April. Inflation has accelerated over the past year, reflecting higher energy costs and the pound’s decline since the Brexit referendum. Price pressures are expected to keep mounting, putting pressure on households as earnings aren’t keeping pace.
There’ll be further evidence of the squeeze this week, with data forecast to show inflation held at 2.7 percent last month, outstripping a 2 percent annual increase in wages in April. Economists expect inflation to reach about 3 percent by the end of the year.
“The outlook for consumer spending continues to look relatively bleak,” said Annabel Fiddes, an economist at IHS Markit.
The evolution prices and earnings is central to the policy debate at the Bank of England, which announces its next decision on Thursday. Governor Mark Carney, who was in purdah during the election campaign will speak later that day at the high-profile Mansion House dinner in London’s financial district.
Consumer spending could come under additional pressure if there’s concern about the foundations of May’s new government and any repercussions on Brexit negotiations and the economy. Sterling declined after the results showed the Conservative Party lost its parliamentary majority, adding to upward pressure on import prices.
