Further drop in consumer confidence

Each of the seven indicators of confidence has fallen since January, which has been reflected in weaker U.K. retail sales figures. However, while there is speculation about the possibility of a rate cut, Nationwide forecasts a 75% probability that the Base Rate will remain unchanged.

House price inflation greatly affects consumer spending. As house price inflation slows, consumers feel more cautious. In June 2004, the 3 month average for monthly house price growth was 1.5%, in 2005 the figure is just 0.3%. Nationwide has been monitoring what consumers think will happen to house prices, to gauge confidence. Whilst in April consumers thought that house prices would increase by 2.6% over the next 6 months, in June this forecast had fallen to just 1.5%. This reflects the ongoing fall in consumer confidence and suggests that higher levels of growth are unlikely in the short-term.

The largest fall, month-on-month, was in people's confidence in the number of jobs currently available, which fell by 12 percentage points. The two measures of confidence in the number of jobs available ("Employment") both fell this month and are now at their lowest level since Nationwide started measuring confidence last year.

This month's fall in confidence is part of a longer-term trend. Since the beginning of the year all seven indicators of consumer confidence have fallen. This has been reflected in changing consumer behaviour.

While in January, retail sales were increasing at a yearly rate of 2.2%; in May that rate of growth had slipped to 1.3%, its lowest level since 1999. In addition, the British Retail Consortium reported that same-store sales actually fell by 2.4% in May and warned of a consumer-led recession. In June, Dixons and House of Fraser joined the growing list of retailers that have announced a fall in sales, signalling tough trading conditions on the high street.

In its June meeting, the Monetary Policy Committee voted 7-2 to keep Base Rate at 4.75%, with the two dissenters voting for a rate reduction. In its minutes the committee noted the risk of a slowdown in consumer spending and observed that "consumer confidence had edged down".

Commenting on the figures Alan Oliver, Nationwide's Head of External Affairs, said: "Over the last six months, all seven indicators of confidence have fallen, reflecting the fact that people are feeling increasingly uncertain. Consumers now feel less positive about how things are today, as well as how things will be in the future, something we didn't see last month. As this negative sentiment gathers momentum it is something the MPC will find increasingly difficult to ignore."