Update on external influences - UK consumer spending falls

Credit and debit card firm Visa have the data to give us a very comprehensive view of how much we are spending, and what we are buying. Their latest data, produced yesterday, shows that although spending on 'experiences' - at hotels and on eating out - is still rising, overall sales were 0.8% down on last year, and in particular spending on clothes and shoes.

We spent 5.3% less in physical stores in May, with sales there dropping at their fastest pace for over five years.

And even though spending still grew, there is evidence that people are looking for bargains, deals and special offers there, so are much more careful about what they choose.

Looking for the cause of this change, the Office of National Statistics shows that wage growth is slower than the increase in prices (inflation rate) - wage growth was only 2.1%, and inflation grew at 2.7% (and look out for a higher rate expected to be announced today). Therefore consumers are aware that their income is not buying as much, and are more careful about how they spend their money.

The increase in price inflation is largely due to the fall in the value of sterling - a weaker exchange rate means that imports cost more; the pound is worth 16-17% less against the dollar and the euro so that all the goods we buy from abroad become more expensive.

Firms will need to decide how to respond - can they afford to cut their profits and keep prices stable, or will they need to raise the price they charge?

The impact on individual businesses will, of course, depend on the nature of their product:

- do they import raw materials?

- do they sell essentials which consumers will have to keep buying, or goods/services that consumers can cut back on while they feel the need to be cautious?

- do they face a lot of competition from others who are offering special offers and cut prices?

- are they buying from suppliers who are also facing rising costs and falling demand?

- are they diversified across several markets or products, allowing them to spread the risk of falling consumer spending, or is all their investment concentrated into one market which may be vulnerable?