The latest reading of a consumer spending index by the payments technology company Visa showed British households spent 0.3% less in June than the same month last year. It was the second month in a row that spending has fallen on an annual basis, Visa said.
There was more detail in the Visa numbers, including that the overall fall included a 2.4% fall in face-to-face spending in shops, a 3.4% fall in spending on household goods and a 1.3% fall in recreation and culture spending. Only e-commerce spending increased, and by less than last month.
It meant that June completed, Visa said, the worst quarter for consumer spending since the middle of 2013.
None of this should come as a particular surprise given what we know is happening to prices and earnings.
Inflation has been accelerating ahead of wages, leaving shoppers with less money to spend. That effect is expected to be underlined on Wednesday when official UK Labour market figures are released, with a 1.8% year-on-year rise forecasted that compares to official inflation running at 2.7%.
Visa said that, while spending overall slowed, spending on essentials such as food and drink rose. Kevin Jenkins, UK & Ireland Managing Director at Visa, said: “It’s clear that inflation is beginning to affect shopping habits too, with consumers diverting their spending to essentials. Spend on food and drink grew by nearly 2%, while household goods suffered from a substantial drop as consumers cut back on big ticket furniture and homewares.”
From an investment point of view, this recent squeeze on households raises questions about various trends currently in motion.
One is the presumption that we are, albeit slowly, moving towards more normal monetary policy. The Bank of England has been getting gradually closer to raising rates but doing it when households are already coping with falling disposable income would be at odds with the safety-first rhetoric we have heard from the Bank under Governor Mark Carney.
The conundrum is that higher rates would help tackle inflation that is running above the Bank’s target, yet this inflation is making people poorer and makes raising rates trickier to do.
This delay could mean the frequently forecasted correction in bond prices, and those of “bond proxy” equities, may have to wait a bit longer. Prices for bond proxies - those companies in defensive sectors paying reliable income - were driven higher as the low-rate world became established but have been falling out of favour as investors have been tempted by low valuations on more “cyclical” stocks.
That rotation, in the UK at least, will look less certain if growth slows because cyclicals do less well in those conditions.
Equity income funds can be an effective way of riding out uncertainties in the wider economy because returns are helped by dividends.
Our Select 50 list of favourite funds contains several that expressly seek out companies paying an income higher than the market. The JOHCM UK Equity Income Fund and Fidelity Enhanced Income Fund concentrate on the UK, or for a global focus The Fidelity Global Dividend Fund and Invesco Perpetual Global Equity Income Fund do this across the world.
Ed joined Fidelity in 2016 following a 13-year career in newspaper journalism, most recently as investment editor at The Daily Telegraph. He was previously news editor and personal finance editor for Thisismoney.co.uk, the money channel for Mail Online and has contributed articles to the Daily Mail.
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