Consumer Spending

Consumption is spending by households on goods & services. Consumer spending is biggest single component of aggregate demand in the UK.

Key factors influencing consumer spending

• Changes in real disposable incomes (Yd) for households e.g. from changes in direct taxes and state welfare payments
• Level of and changes in employment & job security
• Availability and cost of consumer credit – affects willingness to borrow
• Cost of servicing a mortgage (i.e. monthly interest payments)
• Changes in asset prices such as property and shares – possible wealth effect
• Expectations of future price changes e.g. if there is persistent price deflation
• General state of consumer confidence / pessimism (“animal spirits”)

Consumer spending - key terms

• Base interest rate: Set by the Bank of England, it is the rate of interest used by commercial banks as the basis for their own lending rates.
• Consumer confidence: Expectations about the future including interest rates, prices, incomes and jobs.
• Disposable income: Income after the deduction of direct taxes and addition of welfare benefits.
• FTSE-100 Index: The FTSE-100 tracks share-prices of the 100 largest companies listed on the London Stock Exchange.
• Savings ratio: The ratio of personal saving to household disposable income (usually expressed as a percentage).