Spending growth strong despite weak earnings

The prospects look bright for a continued solid recovery in consumer spending. Although we do notknow yet what happened to overall consumer spending in Q2, the available data on retail sales andspending off the high street point to another strong rise. This is particularly surprising, given that realwages were still falling in Q2. However, we expect consumers’ pay packets may start to bulk outagain later this year. For one, survey measures of workers’ pay remain upbeat. And, the subduedoutlook for inflation – CPI inflation still looks set to ease to as low as 1% by the end of this year –should provide a boon to real incomes. Accordingly, we think that consumer spending will rise by asolid 3% or so this year, 2.7% in 2015 and 2.5% in 2016.