Zero inflation boosts consumers’ spending power

The trend in retail sales growth still looks healthy and there are reasons to be optimistic that consumer spending will remain strong. Most importantly, inflation has fallen sharply and is now on the cusp of becoming deflation. Given that this is being driven by falling food and energy prices, it is the “good” sort of deflation for consumers and should boost their spending power significantly. The Budget also helped the outlook for consumer incomes, particularly the further rise in the personal tax allowance that was announced. Accordingly, we still expect robust consumer spending growth of about 3% in real terms this year. Growth is likely to slow next year as inflation picks up again and the government spending cuts intensify. But spending should still rise by a solid 2.5% or so.