By Claire West

New Cebr forecasts show that the squeeze on household spending power in the UK is set to come to an end in 2013. The forecasts are released as part of the economics consultancy’s quarterly UK Prospects report.

Next year, real household disposable incomes are expected to show their first annual increase since 2010. A combination of falling inflation and higher tax free personal allowances means that household budgets will stretch further in 2013.

Inflation on the consumer price index (CPI) is expected to fall to just 1.6% by Q2 2013, with inflation for the year as a whole averaging 1.8%. That is, inflation is expected to undershoot the Bank of England’s central target of 2.0% next year. The weak global economic environment is expected to curb global commodity prices over the coming quarters, bringing inflation down across much of the world.

Next April, a record £1,100 increase in the Income Tax free personal allowance from £8,105 to £9,205 will also boost household spending power in the UK.

Scott Corfe, Cebr Senior Economist and main author of the report, said, “the weak global economy comes with one benefit for consumers — falling inflation. Slowing price growth will boost household spending power and also give the Bank of England room for manoeuvre in keeping interest rates on hold until 2016.

However, consumers have been hit hard by declining living standards in recent years. Even with growth from 2013 onwards, real disposable incomes aren’t expected to surpass their 2010 peak level until 2015.”

Charles Davis, Head of Macroeconomics at Cebr, said, “economic indicators we produce, such as the Asda Income Tracker, are starting to show the squeeze on household spending power coming to an end. This process is likely to continue over the coming quarters, with some reasonable growth in spending power come next year.”