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).
