An extended version of an article appearing in today’s Irish News Business Insight

Driving home for Christmas and pulling a cracker set to be cheapest in years as inflation remains a ghost of past...

The festive season is the time of the year when consumers perhaps feel under most pressure to spend. And this Christmas, they might be more inclined to do so, as 2015 has been the best year for household finances since 2008.

Falling food and energy prices, coupled with a return of pay rises, have boosted disposable incomes. Indeed, real earnings growth for the UK has been rising at its fastest rate in a decade.

This has brought welcome cheer for consumers following several years in which household finances were hit by rampant inflation and low or no pay rises. For five years, from October 2009, consumer price inflation (CPI) outpaced average earnings growth. However, since October 2014 wages have risen at a faster rate than inflation.

The recent pick-up in wage growth has been particularly marked in Northern Ireland, with the largest increase in full-time gross median earnings of the 12 UK regions. Northern Ireland’s 5.4% annual rise in pay this year (UK +1.9%) represented the biggest rise in 11 years and the first real terms increase since 2009.

Whilst incomes have been going up, the cost of living has been going down. 2014 saw the annual CPI inflation rate hit a record low of 0.5%. This will be eclipsed this year, with the annual rate of CPI set to average 0% for 2015. However, this headline conceals ‘biflation’ - two different rates of inflation in the economy at the same time – with services inflation currently running at almost 2.5% per year, and the price of goods falling at close to 2% per annum.

Those inflation anoraks checking their receipts from last year and comparing with this year will be in for a pleasant surprise. The lesser known Christmas Dinner Index - the collective price of the typical elements of a Christmas meal (compiled by Mintec the commodities analytics firm) - has fallen by 1% this year. This follows the 4% decline last year, taking the Christmas Dinner Index to a four-year low. While the cost of Turkey has risen by 1% in the past 12 months, the mince pie has fallen by the same amount. The escalating cost of dried fruit has been more than offset by the 7% drop in the cost of the pastry, as butter and wheat prices declined and sugar is at a record low!

Those indulging in alcohol at home over the festive period will be encouraged to note that the cost of alcoholic drinks is at a three-year low and has fallen by close to 3% in 2015. Wine and beer are down over 2% and almost 5% respectively. Indeed, the price of beer is approaching a five-year low. The cost of Christmas crackers has also fallen significantly, which might bring more of a smile to revellers’ faces than the jokes inside. The fall in the global price of recycled paper has also driven down the cost of paper hats by 11%.

Heating bills are substantially reduced relative to Christmas’s past. Gas prices have fallen by 6% since last year with this year set to see the lowest gas prices in almost four years. Meanwhile the cost of domestic home heating oil has fallen by around one-third over the last year. The average price of 1,000 litres of home heating oil is set to fall below £300 in the coming weeks. This compares with over £600 in each December between 2010 and 2013. The price peaked at almost £700 in February 2013, making prices some 55% lower today and the lowest level since Christmas 2006 when Leona Lewis was number one in the charts. So there will be no need to put that dodgy Christmas jumper on to keep warm this Christmas!

Driving home for Christmas could also be the cheapest in years, with petrol prices falling. At the start of December last year, the average price of a litre of petrol was £1.20; today prices are 13% lower on average at £1.04 with the falling oil price set to take prices below £1 for the first time since June 2009 in the coming weeks. Indeed, some retailers have already introduced 99p per litre in their petrol forecourts.

Those people heading for the ski slopes may discover that their pound goes much further than in previous years. Those regular skiers in the Eurozone will notice that the pound buys more euros this festive season than at any time since 2006. The same is not true for those heading for the pistes in the US. The strong dollar will crimp their spending power. Conversely, the weak Canadian dollar offers those cost conscious individuals seeking a North American skiing experience better value for money. Sterling is at a 7-year high against the Loonie.

Overall, falling food and energy prices are boosting disposable incomes, and this is set to continue well into 2016. Furthermore, last month’s decision to scrap the planned scaling back of working families tax credits from next April was viewed by many as an early Christmas present.

But whilst it has been a good year for consumers’ finances, will it be a good year for retailers?

The ‘noflation’ feel-good factor embracing households’ finances was not evident in last week’s British Retail Consortium (BRC) survey for November. According to the BRC’s monthly sales monitor, retail sales grew at their weakest pace for any November since 2011. Black Friday discounts failed to compensate retailers for poor trading earlier in the month.

Like-for-like sales in stores and online last month fell marginally relative to the corresponding period last year. David McCorquodale, head of retail at KPMG, which produces the figures for BRC, said the data comes as a “reality check” for the sector “with consumers holding off for a Black Friday bargain pitted against retailers determined to hold on to their hard-earned margins”.

Northern Ireland retailers face the additional challenge of an unfavourable exchange rate making Christmas shopping tourism south of the border attractive. This December, sterling is 8% stronger than it was last December and is stronger against the euro than at any December since 2007.

There is also the likelihood that job security fears are impacting on consumer confidence. We have already heard substantial announcements regarding upcoming jobs losses in Northern Ireland’s manufacturing sector, and fears regarding jobs losses elsewhere in the sector as the global slowdown impacts on demand.

Indeed, this lack of consumer confidence is evident in new car sales, which were down in the first 11 months of 2015 relative to last year, with 2015 as a whole looking set to record the first annual fall in new car sales since 2011.

So whilst driving home for Christmas and pulling a cracker might be the cheapest in years as consumers enjoy favourable inflation and wage conditions, retailers may be wondering do they know it’s Christmas time at all.

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