GROWTH in consumer spending will remain sluggish this year in spite of falling inflation, according to economists who have highlighted the pressure on middle income earners.
The EY Item Club predicted the rate of growth in spending will fall to a seven year low of 1.3 per cent this year, from 1.4% in 2016.
The club forecast the inflation rate will ease to 2.1% by the end of the year, as the impacts of the fall in the pound since the Brexit vote and fuel price rises last year wear off. Inflation peaked at 3.1% in November.
However EY’s chief economist Mark Gregory, said: “Workers at either end of the income distribution should fare best over the next few years.”
He added: “The middle will remain squeezed.”
Mr Gregory said lower earners will see their spending power boosted by further rises in the National Living Wage and falling inflation in the food, petrol and energy categories. Those at the upper end will benefit from skills shortages pushing up wages.
People on middle incomes, of around £28,000, earn too much to benefit from the living wage and are feeling the impact of tax changes. Automation is putting pressure on salaries.
The Item Club noted consumer spending is a key driver of growth in the economy.
It said retailers will need to fight smart to retain their share of spending.
“They will need to look at what their competitors are doing, gain a better understanding of their own target customers and provide them with the right experience,” said Julie Carlyle, EY’s head of retail in the UK . Branding issues will be increasingly important.
The Item Club expects consumer spending to increase by 1.6% in 2019 and by 1.9% in 2020. The growth rate hit a 12 year high of 2.9% in 2016.
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