Inflation and petrol prices put a squeeze on family spending power

  • Inflation hits the highest level since July 2014 at 1.6%
  • Petrol prices have increased by 10% since December 2015, the largest increase for 5 years
  • Families could still enjoy £202 of discretionary income in December– a 4.4% increase from the same time last year
  • The North East and Yorkshire see the fastest growth in spending power across the regions

The latest figures from Asda’s Income Tracker reveal that whilst rising inflation continues to impact disposable income growth, families still enjoyed an average of £202 discretionary income last month.

As UK families headed into the festive season they had £8.57 more in their pockets than in December 2015.

However, despite the positive growth, inflation continues to impact spending power. The rate hit 1.6% in December – the highest rate for 18 months and putting it closer to the Bank of England’s target of 2%. The weakened pound and rising oil prices continued to drive the increase and in December petrol prices were 10% more expensive than the same time last year, which is the largest increase in five years.

The rise in inflation put more pressure on families spending power; however it was cushioned by an equivalent increase in net income. Up 2.3% year on year, family’s net pay meant that an increase in the prices of essential items didn’t affect their disposable income by as much. In the three months to November, regular earnings growth was up 2.7% and unemployment remained steady at 4.8% which proved beneficial for family’s net income. A good performance in the labour market meant that employees had a better bargaining power for their pay.

Food prices in December remained lower by 1.1% year on year, however month on month, food prices saw a 0.8% increase compared to November. And it is not only essential items that inflation is affecting, December also saw an increase in the cost of restaurants and hotels.

There was some relief on households as electricity and gas prices eased compared to those at the end of 2015, which helped keep household bills down. Low interest rates also helped to keep mortgage interest payments down, which were 6% cheaper year on year.

From a regional perspective, the North East had the fastest growth in disposable income for Q4, with an increase of 10.1% compared to the same quarter in 2015. Yorkshire and the Humber and Northern Ireland recorded the second highest annual Q4 growth rates in disposable income with 7.9% each. However, London remained at the top of the spending power list, with £275 of discretionary income in December, £73 more than the UK average.

Scotland dropped back below the UK average in Q4, after posting stronger growth in the first three quarters of the year.

Households from the East of England had the second highest discretionary income at £225 per week. At the opposite end of the scale, Northern Ireland had the lowest average spending power at £105.

An Asda spokesperson said: “As we begin 2017, it is clear to see that prices are at the top of customers’ minds, across a range of different categories. It is pleasing to see that families across the UK are still seeing growth in their spending power, despite the pressure customer price inflation is putting on the price of essential items.

“It will be interesting to see what the income tracker reveals this year, and we will be watching closely to spot the key changes for customers each month.”

Kay Neufeld, Economist, Cebr, said: “Rising inflation is clearly weighing on the growth in spending power now. Price increases in most product categories – from meals in restaurants to air fares – reduce the spending power of UK households. This is most clearly visible in the rising prices at the pump – annual price inflation for fuel stood at 10% in December, the highest rate in nearly 5 years.”

“In the last months of 2016 we have seen an uptick in wage growth due low unemployment and the lagged effects of the National Living Wage. The question in 2017 will be whether wage growth can keep up with rising inflation. Early indicators suggest that the labour market will soften over the coming months – an increase in unemployment and lower wage growth are on the cards potentially putting a dent in households’ spending power”.

ENDS