Consumer spending growth expected to drop to four-year-low in 2017

Consumer spending growth will slump to a four-year low as households feel the pinch from inflation, welfare cuts and weaker earnings, a report has said.

Real consumer spending is expected to eke out its weakest rate since 2013, rising 1.7% this year compared to a 12-year high of 3.1% in 2016, according to the EY Item Club.

The economic think tank said people on low incomes will take the biggest hit, with inflation forecast to reach a five-year high at 2.8% this year, while growth in real earnings sinks to 0.1% from 1.8% in 2016.

Martin Beck, senior economic advisor to the EY Item Club, said it will be another two years before earnings growth picks up again.

He said: "Higher inflation will be the key culprit in the sharp slowdown in consumer spending growth this year, cutting off what has been an all-too-brief revival in real pay growth and continuing the dismal picture for real earnings seen since the financial crisis.

"There should be some improvement in 2018, as inflation begins to cool, but even then we anticipate real wage growth of just 0.7%.

"It is likely to be 2019 before workers begin to enjoy more 'normal' rates of real wage growth again."

Welfare cuts will put the squeeze on non-work incomes, leaving benefit claimants with less money to spend, the think tank added.

Low-income households will also be forced to grapple with higher costs for essential items such as food, energy and petrol, as inflation ratchets up the prices.

The Office for National Statistics revealed last month that average food store prices increased by 0.5% on the month in January - its largest rise since April 2013.

However, EY Item Club said consumer spending may be propped up by people dipping into their savings, as households' net financial wealth - including bank deposits, equities and pension fund investments - grew strongly towards the end of last year.

"Lower-income households will be disproportionately hurt by the increase in inflation combined with welfare cuts, while rises in the National Living Wage (NLW) will support this group by less than appears at first sight," Mr Beck added.

"Furthermore, the silver lining this year of stronger household balance sheets and robust dividend payments will overwhelmingly accrue to the better-off."

It comes as inflation reached a two-and-a-half-year high at 1.8% in January and retail sales unexpectedly fell by 0.3% in the month.

Ballooning import prices triggered by the Brexit-hit pound are a key factor behind the rise in everyday prices as companies pass their soaring costs on to consumers.

Julie Carlyle, head of retail at EY, UK and Ireland, added: "The 'margin vice' caused by currency devaluation, discounting and the NLW, coupled with the costs of delivering the seamless omni-channel service that consumers now expect, make these difficult times for retailers.

"In order to thrive, retailers need to look at how they can evolve and shape the future rather than react to short-term customer demands."