Families' spending power squeezed

The average UK household budget has fallen by £910 a year in 2011 compared with two years ago - the biggest peace-time family spending power squeeze since 1921 - according to a new report.

The report from the Centre for Economics and Business Research (CEBR) said that disposable incomes are due to fall by 2% this year, following a 0.8% drop in 2010.

According to the report, the finance hit is driven by an anticipated mismatch between the rise in pay levels and the cost of essential commodities such as oil, utility bills, food and clothes.

The report expects inflation to average at 3.9% this year, its highest since 1992, while wages are predicted to go up by just 1.9% as unemployment remains high and the public sector makes cut-backs.

However, the Government's austerity drive is "only a minor element in the squeeze on household incomes", with the soaring cost of commodities being the major factor, claimed the report.

Commodity prices are being driven higher by surging demand from emerging economies such as China, and supply shocks including the conflict in Libya, which is impacting the price of oil.

The lack of consumer spending power means the economy will only grow by 1% in 2011 and will be "subdued" for the next two or three years, said the consultancy. Its forecast is significantly below the 1.7% predicted by Government's Office for Budget Responsibility.

The CEBR's report echoes the views of Bank of England governor Mervyn King who earlier this year said consumers' finances were facing their biggest squeeze since the 1920s.

A spate of retailers have reported tough conditions on the high street in 2011 as consumers remain cautious, with HMV and Dixons Retail which owns Currys and PC World reporting disappointing profits.

According to the report, this year's household spending squeeze is the biggest apart from during World War Two and the recession following the First World War.

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