Philip Bunn and Alice Pugh
“UK prepares for pensions spending spree” “House prices set to soar by 30 per cent as savers raid pension funds” These were some of the headlines which followed the pension reforms announced by the UK government in the 2014 and 2015 Budgets. But how much truth do they contain? In contrast to some of the headlines, results from a household survey commissioned by the Bank suggest that greater pension freedom will have only a small impact on household spending. And – although a number households would like to invest funds withdrawn from their pension in property – only a subset of these are likely to be able to afford to do so, and some may have bought property even without the reforms.
Phil Bunn, Lizzie Drapper, Alice Pugh and Jeremy Rowe.
If the car you’re thinking of buying may be £500 cheaper in six months’ time, why not wait until then to buy it? This kind of thinking is one reason why falling prices trouble central bankers. The spectre of deflation is especially dangerous when households keep delaying their spending in expectation of further price falls. With the economy experiencing close to zero inflation, households may have adjusted their expectations of future prices. But how important are these expectations in influencing household spending? Using a rich household survey dataset we find that while there is some evidence that lower inflation expectations lead to lower spending, income expectations (reassuringly) also play an important role, and they have picked up recently.