Spending power flat, report finds

People are no better off financially than they were a year ago and their ability to spend on the high street is likely to remain "subdued" in the coming months, a study has found.

After inflation, people's spending power showed no growth at all in July compared with the same time last year, meaning consumers had no extra money to spend on discretionary items last month, Lloyds TSB found.

The 0% figure means that, once essential items had been paid for, spending power was flat compared with a year ago.

The continued squeeze on people's budgets from weak income growth amid tough employment conditions means that any noticeable improvement in the amount of money people have left over is still to be seen, the report said.

Annual growth in spending on essentials has slowed to 3.2%, its lowest level since November last year, partly driven by smaller debt repayments and lower petrol prices in recent months which have given household budgets "some relief". But despite this improvement, income growth fell back in July to 2.4%, also its lowest level since November 2011, putting a further strain on people's pockets.

Jatin Patel, director of current accounts for Lloyds TSB, said: "Annual growth in essential spending is not putting downward pressure on budgets in the same way as it was earlier in the year, but with income growth still weak, we are yet to see any noticeable improvement in the amount of money people have left over for discretionary purchases. Until we see this, spending on the high street will likely remain subdued for many in the near future."

Lloyds TSB's consumer research found that more than four fifths (81%) of people had noticed the cost of essentials and everyday spending increasing in the past 12 months. However, this compares with a higher proportion of 86% of people saying this three months ago, suggesting that some people are starting to feel an effect from some recent falls in inflation on their pockets.

The proportion of people spending all of their income on household bills and essentials has been in decline, reaching 16% in July 2012 compared with 19% in February.

The study follows a surprise increase in inflation last week, when the retail prices index (RPI) figure for July, which is used to determine how much regulated rail fares are allowed to increase by in 2013, rose to 3.2%. The greater-than-expected rise in RPI was accompanied by an increase in the consumer prices index (CPI) rate to 2.6%, following recent declines.

The increase was driven by hefty hikes in air fares, while there were fewer discounts from retailers who had already slashed prices to shift stock amid the wet weather.