By Stuart Berry of the Bank's Sterling Markets Division and Melissa Davey of the Bank's Conjunctural Assessment and Projections Division.
In the United Kingdom, movements in confidence have been closely related to annual real consumption growth over the past 30 years. But both these series have common determinants. This article shows that the standard economic determinants of consumption such as income, wealth and interest rates can 'explain' a large part of the movements in consumer confidence. However, confidence is also affected by non-economic events, or may react in a complex manner to unusual economic events. We find that such 'unexplained' movements in consumer confidence do not appear to be closely related to households' spending decisions on average. So although consumer confidence indices are published well ahead of official data on consumer spending it is important to consider why confidence has changed before assessing its likely implications for consumption.
How should we think about consumer confidence?