On the face of it, households appear to be coping with the squeeze on their real incomes fairly well.
Despite the fact that inflation has outpaced annual growth in wages in all but one month so far this year, growth in the value of high street spending has averaged 5%.
This suggests warnings that consumers are tightening their belts sharply in response to either Brexit uncertainty or higher inflation are overdone.
That said, growth in sales volumes has been much more subdued, meaning that households are finding that their money buys them less.
“Consumers are generally upbeat about their own personal financial situation, and about making a major purchase”
What’s more, consumer confidence remains fairly robust. Of course, consumers are pretty downbeat about the outlook for the overall economy over the next twelve months – there is still a great deal of uncertainty about the UK’s departure from the European Union.
But consumers are generally upbeat about their own personal financial situation, and about making a major purchase.
On the one hand, this has meant that households remain confident enough to borrow in order to help them sustain their spending.
However, the latest figures show that consumer credit has continued to grow at an annual rate of close to 10%, leading to concern that spending is merely being fuelled by another unsustainable pick-up in borrowing.
A return to wage growth
The rise in credit only explains a small proportion of the increase in spending, with other supportive factors such as rising employment playing a large part too.
And in any case, debt servicing costs remain low by past standards, suggesting that on the whole, households are not overburdened by debt.
As I set out in my last column for Retail Week, I think we are probably close to the peak of price inflation now, meaning that it should drop back gradually next year as the temporary effects of the pound’s post-referendum slide begin to fade.
Admittedly, if wage growth does not pick up at all, then the squeeze on real earnings will probably last for about another year – although it would still be much less severe, and much less prolonged than that seen following the last big drop in the pound during 2008/09.
As it happens, though, I think there is a bit of scope for a pick-up in wage growth.
With the unemployment rate at its lowest level since 1975, firms’ hiring intentions remaining strong, and with signs of recruitment difficulties in some sectors emerging, there should be more pressure on companies to award higher pay increases to workers.
I don’t think we’ll see a return to the 4% to 5% rates of earnings growth that was typical in the pre-crisis era, but I’m optimistic that at least some acceleration is in prospect.
If this proves correct, then I expect to see real wages rising again from around the middle of next year.
This should help to provide a more sustainable footing for consumer spending next year. But for now, it is clear that this festive period will be a challenging one for retailers.
Paul Hollingsworth is UK economist at Capital Economics