By Daniel Hunter

Spending power growth dipped to its lowest level since April 2011 in September as income growth weakened following a resurgent August. The decrease means, once essential items had been paid for, people had around £100 less than a year ago to spend on non-essential items.

Data from August had suggested that the pressure on consumer spending power might have eased somewhat year-on-year, however the latest figures from Lloyds TSB’s Spending Power Report indicate that the underlying trend of squeezed household budgets remains.

This recent volatility may in part be attributable to the mixed weather conditions and events over the summer months — such as the Queen’s Jubilee and the London 2012 Olympic Games — influencing consumer behaviour patterns, and is reflective of other economic data over this period displaying similar variance.

At 1.7%, income growth would appear to be the key driver behind the weakness in spending power during September. Incomes grew at the weakest rate since December 2010, and some way off the pace seen towards the second half of last year.

At the same time, there was little change to essential spending growth during the month compared to August as the growth in spending on automotive fuel (2.5% in September compared to 0.7% in August) was offset by a continued decline in the growth of household bills spending, in particular, gas and electricity bills — where spending growth declined by 1.4 percentage points to 8%.

People are now spending 3.3% more on essential items compared to the same time last year — the lowest growth rate seen in this measure since December 2011 — while their reported average monthly grocery spend fell back to £269 in September compared to £273 in August.

“Despite the volatility in the data, it is clear that the underlying trend in real incomes is negative despite the fall in inflation from last year’s high," Patrick Foley, chief economist at Lloyds TSB, said.

"I expect inflation to fall only slightly further over the coming months so any improvement in the situation will need to be driven by growth in incomes and this will depend on the wider economy. The pattern of consumers following rather than driving economic developments appears set to continue.”

Sentiment towards the UK’s economic situation declines

In line with spending data showing little reason for consumers to be cheerful in September, sentiment towards the UK’s economic situation declined during the month despite official figures showing the economy shrank by less than thought in the second quarter of the year.

The proportion who felt the UK’s situation was ‘not at all good’ increased by three percentage points from 42% in August to 45% in September, however this is an improvement of four percentage points when compared to the same time last year.

Overall, those aged 45 and over remain the most pessimistic towards the UK’s economic situation.

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