UK consumer confidence crawls higher despite growing inflation concern

Consumer confidence improved slightly in the UK in February despite increasing worries about inflation, European Commission data revealed on Monday, while eurozone economic sentiment remained broadly flat.

Euro-area data was mixed, with better industrial, services and construction confidence being offset by lower consumer and retail trade confidence.

The rise in UK consumer confidence was slight, with the confidence index edging up to -4.3 in January after dipping to -5.1 in January from -4.6 in December and September’s post-referendum peak of -1.7.

Worries about inflation have kept a lid on consumer confidence, with the EC survey showing UK inflation expectations have spiked above long-term trends, with the balance of people expecting prices to rise over next 12 months advancing to +42.3 in February from +41.7 in January, +38.9 in December and +18.1 in October. The long-term average since 1990 is +22.6.

Economist Howard Archer of IHS Markit noted that consumers’ expectations for their personal financial situations over the next 12 months had weakened markedly in February, while there was also a more downbeat perception of their financial situations over the past 12 months, which the Bank of England will note.

"The survey does little to dilute belief that consumers are becoming increasingly cautious as their purchasing power is increasingly squeezed by markedly rising inflation. Furthermore, the rise in inflation is being led by higher fuel and food prices which affects most people," Archer said.

He also observed that there was a telling further weakening in consumers’ major purchase index in February, which he said was likely to reflect concerns over diminishing purchasing power.

"Not only is consumer’s purchasing power now being markedly diluted – but it looks set to worsen markedly further over the coming months. Indeed, it looks probable that inflation will move above earnings growth during 2017," he said, predicting consumer price inflation will reach 3% before the end of 2017 and could get as high as 3.3% in the early months of 2018.

Eurozone mixed

The business climate index improved to 0.83 from 0.76 when only a rise to 0.79 had been expected but a marked 1.4 percentage point decrease in consumer confidence was said by the EC to reflect more negative assessments of the future general economic situation, future unemployment and households' future financial situations.

Services sentiment rose to 13.8 from 12.8, above the consensus forecast of 13.5, and industrial confidence to to 1.3 from 0.8 when only a rise to 1.2 had been expected.

The 0.5 rise in industry confidence was due to managers' "markedly more optimistic assessment of the current level of overall order books, while their production expectations and their assessment of the stocks of finished products worsened," the EC said.