The latest Deloitte Consumer Tracker shows that an improving labour market and falling inflation are having a pronounced effect on consumer spending behaviours.
In Q4 2014 fewer people suffered a reduction or a loss of income and more people said they had received a pay rise than a year ago. These factors, coupled with low inflation, are underpinning consumers' confidence in their level of disposable income, which remained stable for the third consecutive quarter.
With the Consumer Price Index continuing to fall, reaching its lowest in 14 years in December, disinflation is providing a strong boost to consumers' finances. The Tracker shows that falling prices for essentials, including food, energy and petrol, are freeing more disposable income for discretionary and big ticket purchases.
Categories benefiting from the increase in discretionary spending, and which have registered the strongest increase in net spending this quarter, include hotels and restaurants, major household appliances and consumer technology. Net spending on utilities and groceries is growing more slowly than consumer spending overall, reflecting falling fuel prices at the pump and intense price competition in the grocery sector.
Overall consumer confidence in the fourth quarter was three points higher than a year ago. The long‑term upward trend continued with a net improvement in confidence in 2014 compared to 2013.
While the long‑term trend in confidence is up, short‑term uncertainties have mounted. In Q4 2014, confidence fell three points when compared with the previous quarter. This dip reflected weaker sentiment about health and wellbeing, and job security.
The impact of external factors depressing confidence is echoed in Deloitte's latest survey of chief financial officers. While CFOs expect 2015 to be a good year for their own businesses, they are concerned about external factors such as the UK General Election and economic uncertainty overseas.
Looking ahead there is likely to be more good news for consumers, as real wages are expected to continue to recover. Deloitte's survey of CFOs shows that they anticipate employee earnings in their businesses to rise significantly faster than inflation this year.
A recovery in disposable incomes in 2015 seems likely to shift consumers to more expansionary spending behaviours and to drive growth in more discretionary categories.
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