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UK consumer confidence reached a two-year high in January, according to research company GfK, in the latest positive sign for the economy.
The consumer confidence index, which measures people’s views of their finances as well as their view on broader economic prospects, rose three points month on month to minus 19, the highest level since January 2022.
This was the third consecutive month-on-month increase and followed the release of January’s purchasing manager index last week, which showed economic activity rising at the fastest pace in seven months.
Economists said the findings suggested that January’s cut in national insurance, falling mortgage rates and rising real wages were helping consumer sentiment despite the cost of living crisis still hurting household budgets.
“What really stands out is consumer expectations of personal finance for the next 12 months, which is positive for the first time in two years,” said Joe Staton, client strategy director at GfK. “That shows that things are heading in the right direction and that people are more likely to spend.”
The rise in consumer confidence in the UK compares with a larger-than-expected drop in the eurozone, according to data released earlier in the week.
But an improvement in consumer sentiment does not always feed through to the economy. December retail sales in the UK fell at a surprisingly fast rate, despite GfK’s confidence index ticking upwards.
“Economic momentum in the UK is clearly improving,” said Tomasz Wieladek, an economist at T Rowe Price. “However, the headwinds to consumer confidence could become more powerful in the future, especially if supply chain restrictions become greater and inflation stickier.”
GfK’s consumer confidence index remains negative, which means that the majority of respondents were gloomy about the economy, and is still below the long-term average of minus 17.
There was a slight, unexpected uptick in inflation in December from 3.9 per cent to 4 per cent the previous month. The impact on supply chains from the attacks on shipping in the Red Sea has stoked fears of more persistent price pressures.
The Bank of England is expected to hold interest rates at a 15-year high of 5.25 per cent at its next rate-setting meeting on February 1, with investors betting the benchmark rate will fall to 4.25 per cent by the end of the year with the first cut in June. Expectations of lower borrowing costs have helped a reduction in fixed mortgage rates over the past few months.