Households 'will recover their spending power next year'

The squeeze on family finances should come to an end next year as inflation falls, according to a report by the Centre for Economics & Business Research (CEBR).

Household disposable income will rise faster than prices in 2013 for the first time since 2010, the consultancy said in its quarterly UK Prospects report.

A combination of higher tax-free personal allowances and falling inflation means that household budgets will stretch further in 2013. Inflation has already fallen from 5.2pc in September last year to 2.4pc, with the CEBR predicting a further fall to 1.6pc next spring.

Scott Corfe, senior economist at the think tank and main author of the report, said the weak global economy came with one benefit for consumers falling inflation. “Slowing price growth will boost household spending power and also give the Bank of England room for manoeuvre in keeping interest rates on hold until 2016,” he said.

“However, consumers have been hit hard by declining living standards in recent years. Even with growth from 2013 onwards, real disposable incomes aren't expected to surpass their 2010 peak level until 2015."

Inflation on the consumer prices index (CPI) is expected to fall to just 1.6pc by the second half of 2013, with inflation for the year as a whole averaging 1.8pc. This means that inflation is expected to undershoot the Bank of England's central target of 2pc next year.

According to the report, the weak global economic environment is expected to curb global commodity prices over the coming quarters, bringing inflation down across much of the world.

Next April, a record £1,100 increase in the Income tax-free personal allowance from £8,105 to £9,205 will also boost household spending power in Britain.

Charles Davis, head of macroeconomics at the CEBR, said: “Economic indicators are starting to show the squeeze on household spending power coming to an end. This process is likely to continue over the coming quarters, with some reasonable growth in spending power come next year."