Page last updated at 19:12 GMT, Friday, 4 July 2008 20:12 UK

UK spending power 'in heavy fall'

Retailers are being hit by falling discretionary income, the report says

UK consumer spending power has fallen "dramatically" due to a large rise in the cost of living, research by Ernst & Young suggests.

The average household is 15% worse off than it was five years ago, the Annual Discretionary Income Study says.

After household bills and tax, it found the typical family had less than 20% of its gross income remaining - compared with 28% in 2003.

It added that rate rises and fuel bills meant "the worst could be yet to come".

"Many UK consumer segments are clearly feeling the pinch as big rises in household costs are far outstripping relatively modest wage inflation," said Jason Gordon, director of retail at Ernst & Young.

"The significant decline in discretionary income means consumers are no longer in a position to spend as freely as they have done in the past."

The comments came after Marks & Spencer warned of falling sales as customers turned to cheaper options, especially in food.

Meanwhile John Lewis sales fell 8.3% during the week to June 28 compared to the previous year, led by hefty drops in home and electrical goods sales, with its out-of-town stores being hardest hit.

Fuel factor

The Ernst & Young report said that monthly discretionary income for a typical household was now 772.79 - compared with 909.84 in 2003/04.

And with higher interest rates and a growth in the amount people are borrowing to buy property - average monthly mortgage payments are just under 735 - 78% higher than in 2003/04.

Other findings included:

  • Fixed monthly household costs have risen by almost 45% since 2003/04
  • Petrol costs for a typical household are 193.61 per month - 29.4% higher than in 2003/04
  • Average monthly energy bills have risen by 110% since 2003/04 to 95.80.
  • Council tax is up almost 25% since 2003/04 to 114.50 per month for a band D property.

However the report said that increased competition had brought down the cost of fixed line telephone costs while lower servicing charges and tyre costs had reduced the cost of car upkeep.

"All consumers are painfully aware of the huge hikes in petrol and utility bills but we've also seen some fairly hefty price increases in pension contributions and debt repayments," Mr Gordon said.

"If we go one step further and factor in food price inflation it's clear that household budgets are under enormous strain.

"Add in the impact of falling house prices on the consumer's propensity to spend, and the consumer economy is undoubtedly on a knife-edge.

"Worryingly, though, the worst could be yet to come. If, as predicted, utility prices rise by as much as 40% later this year and interest rates are increased to control rising inflation, consumers and consumer facing businesses will face even bleaker times."

'Challenging' times

Further signs of the recent squeeze on consumer spending came from the latest sales figures from department store chain John Lewis.

The retailer said that sales were down 8.3% during the week to 28 June compared with the same week last year, with home and electrical goods seeing the largest falls.

"There is no doubt that trade in our shops proved challenging when compared to exceptional results last year," said John Lewis's commercial director Phil Hullah.

The news follows gloomy sales figures issued on Wednesday by iconic High Street retailer Marks and Spencer.

Shares in M&S sank by nearly a quarter after the retailer shocked the market by reporting a 5.3% drop in like-for-like UK sales in the past three months.

M&S chief Stuart Rose said consumer spending was set to remain under pressure for the next two years.

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