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June 25, 2007

Rising Household Bills Hit Spending Power

by Gill Montia

Story link: Rising Household Bills Hit Spending Power

Ernst & Young has published a survey showing that increased mortgage payments and living expenses are leaving households with a smaller proportion of income to spend on discretionary purchases than at any time since 2002.

Rises in household costs have been running ahead of wage inflation, leaving the average family in the UK with 22% of gross income remaining once tax contributions, mortgage payments and household bills have been paid. This compares with over 28% in 2003. The survey shows that fixed monthly household costs have increased by almost 32% since 2003/04 with council tax and pension contribution payments both increasing well ahead of inflation.

Whilst strong consumer spending has been central to the UK economy in recent years, resulting in six quarters of above-trend growth, the four interest rate rises since August 2006 are having an impact. Consumer spending has continued to be strong so far because people have been able to borrow against the rising value of their homes. However, interest rates are expected to reach 6% by the end of 2007, and many homeowners coming off fixed-rate agreements will face substantial increases in mortgage repayment costs.

Tesco, the UK’s biggest retailer, is reported to have warned the Bank of England that there are already signs of a slowdown in consumer spending growth, which is cause for concern in the retail sector, because the full impact of past interest rate rises has yet to be felt.


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