A dramatic decline in inflation is unlikely to stop consumer spending from falling for the next three years, research consultancy Capital Economics has warned.
On Tuesday it was revealed that the Consumer Prices Index recorded its biggest fall in 16 years in October, when inflation declined from 5.2 per cent to 4.5 per cent month on month.
But the boost to household spending capacity will be outweighed by other factors, Capital Economics’ Vicky Redwood warned.
She said that even with very low inflation, real disposable income growth is unlikely to return to its long-term average of 2.7 per cent and the total amount of money available for households to spend would rise by just 0.5 per cent in real terms next year.
Falling house prices and unemployment fears are likely to prompt many consumers to save rather than spend any extra income they have.
Redwood said: “We doubt that the recovery in real household income growth will prevent a sharp fall in spending. We expect real spending to fall by about 2 per cent next year, 1.5 per cent in 2010 and 0.5 per cent in 2011.”
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