Report reveals spending dropped 5% in 2008-9, as data shows 5.2% rise in prices driven by energy, food and transport
Inflation has hit a three-year high, underlining fears that squeezed UK households will continue to cut back as a thinktank predicts spending will not recover to its pre-recession level until at least 2013.
The Institute for Fiscal Studies lays bare a drop in spending that is longer and deeper than during any recession in recent history. Charities are warning that many households continue to struggle to buy even essentials such as food.
The official data showed consumer price inflation rose more than expected to 5.2% in September from 4.5% in August ? the highest since September 2008 ? as household energy bills soared.
The rise was largely driven by a jump in average gas bills of 13% and an increase of 7.5% in electricity bills in September, reflecting recent complaints from households, politicians and consumer groups over rising bills.
Food and transport costs were also significantly higher than a year earlier ? 6.4% and 8.9% respectively ? prompting warnings that high inflation will hurt already lacklustre economic growth as consumer spending falters.
Research by the IFS indicates that during the 2008-09 recession household spending, which accounts for around two-thirds of GDP, fell by almost 5% in real terms. Young people in particular cut back. That drop compared with falls of 3% during the recessions of the early 1980s and early 1990s.
"Continued economic weakness has gone hand in hand with continued low levels of household spending, and the drop in spending since 2008 has been unprecedented in recent history in its scale and its persistence," said Cormac O'Dea, a senior research economist at the IFS.
In common with other recessions, spending on holidays, alcohol and eating out fell significantly. But one factor that set the recent downturn apart was a fall in food purchases, not previously seen in downturns, possibly reflecting food price increases, the thinktank said.
Former Bank of England policymaker Andrew Sentance said there was already evidence inflation was affecting growth in the short term. In that context, he questioned the move by the Bank's monetary policy this month to launch a fresh round of quantitative easing ? a way of pumping fresh electronic money into the economy.
"I don't think it was the right thing to do because it does not address the problem we face which is that a large part of the squeeze on growth is coming from inflation," he said.
"I argue that the MPC should have taken steps to address that in the late part of last year," he added, echoing his calls for rate rises from mid-2010 until he left the committee in May this year. He said inflation data again showed the "underlying inflationary picture is more difficult than the MPC is acknowledging".
With wages rising at a much slower pace ? an average of 1.8% according to the latest official data ? charities said the most vulnerable in society were struggling.
Some households are now borrowing just to cover essentials, said the Money Advice Trust.
"This dangerous combination of stagnating wage growth, increasing unemployment and high inflation means many people are having to cut back drastically on their outgoings, and some even rely on credit to pay for essentials such as food and energy bills," said the charity's chief executive, Joanna Elson.
Age UK said older people would be particularly affected by higher energy prices and forced to make difficult choices. "For some it will mean cutting back on heating or how much they spend on food or both," said its director, Michelle Mitchell. "Our latest estimates show there are now over 4.8 million people over 60 years of age who are fuel poor. By cutting back on heating or food, many will be increasing their risk of becoming seriously ill."
But economists said that while September's number was higher than most had expected, it was likely to be the peak.
Jonathan Loynes, chief European economist at Capital Economics, described the inflation data as "a bit of a nasty surprise" but added: "We still think inflation will fall sharply over the next year as food/energy and VAT effects drop out and core inflation finally eases."
For those on state benefits, including pensioners, there was a small advantage in the higher than expected reading, as the September consumer price index (CPI) number will be used to set payouts.
Employee benefits firm Towers Watson calculates the full weekly basic state pension for a single pensioner is likely to rise by �5.30 to �107.45 from April 2012. That is more than if it were to rise only in line with national average earnings growth - the minimum increase that the government must award. However, it is slightly less than pensioners would have received under the old policy of linking the pension to RPI inflation.
For the government, the latest CPI number means further strain on the public finances.
The Office for Budget Responsibility, whose forecasts are used by the Treasury, had predicted September inflation would be 4.3%. Under that estimate the benefit bill stood at a total of �207.8bn. The IFS calculates the total with CPI at 5.2% is closer to �209.6bn ? �1.8bn higher than expected.
Source: http://www.guardian.co.uk/business/2011/oct/19/spending-falls-inflation-hits-high
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