Disposable Income Drops, Low Interest Rates to Remain

Our disposable income has seen the biggest drop for 34 years – that’s the stark conclusion to be drawn new Office for National Statistics (ONS) figures, which reveal how much more difficult it’s becoming to make ends meet.

Disposable income dropsThe squeeze is down to a number of factors, including a rise in food and energy costs, January’s VAT hike, prices at the petrol pump and wages that aren’t keeping pace with inflation.

Consumer spending fell 0.6% for the second quarter in succession, suggesting that households are cutting back in the face of increasingly expensive goods and services. Little wonder given that the annual fall in household income stands at 2.7% – the biggest drop since 1977.

At the same time, the amount of money left over for savings shrank – households put away only 4.6% of their incomes in savings accounts or similar reserves, compared to 5.2% in the previous quarter.

And while the economy grew by 0.5% in the first quarter, the previous quarter’s 0.5% dip is clearly catching up with consumers.

Bank of England Governor Sir Mervyn King was frank in his assessment, pointing out that uncomfortably high inflation is leading to “a very substantial squeeze on real living standards”.

Interest rates unlikely to rise

The Governor has some good news for cash-strapped homeowners, however. Speaking to the Treasury select committee he appeared to rule out immediate interest rate rises that could increase mortgage repayments. “The reason we would raise interest rates would be in the context of a much stronger economy with unemployment falling rather than rising,” he said.

However, if you are finding mortgage repayments tough, be warned. Sir Mervyn warned that the current 0.5% interest rates would have to return to “more normal levels” in the future.

Moneyhighstreet says: “There’s little to surprise consumers in these figures – they emphasise the financial constraints most households have been suffering for some time.

“If you want your personal finances to ride out what Mervyn King is calling ‘an uncomfortable period’, do all you can to put money aside in savings accounts, cut your energy bills by seeking better deals and try to prepare for any interest rate rises in the future – they will have a significant effect on your mortgage repayments.”

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