By Robert Hamilton of the Bank ’ s Structural Economic

Real household consumption in the United Kingdom increased by about 4% during 2001. This was the sixth consecutive year of above-average growth—the longest above-trend period over the past five decades (see Chart 1). During the second half of the 1990s, consumer spending was boosted by robust growth in households' real disposable incomes, as well as strong gains in household wealth, particularly from increases in house prices. (1) However, the continued strength of consumption growth in 2001 was surprising. For example, the Bank of England's August 2000 Inflation Report expressed the MPC's view that 'consumption growth is likely to moderate from its high levels in recent years'. Much of the recent buoyancy of consumer spending has been accounted for by particularly rapid growth in spending on durable goods. (2) Despite making up about 15% of total consumer spending, durables accounted for around half the growth in consumption during 2001 (see Chart 2). Household consumption in the United Kingdom grew by about 4% during 2001. This was largely accounted for by unusually strong spending on durable goods—growth in spending on other goods and services slowed to around a six-year low. This article discusses why spending on durable goods needs to be analysed differently from that on other types of goods, and provides some possible explanations for its recent unusual strength. In addition, an alternative estimate of consumption is presented that replaces the expenditure on durable goods with the flow of services derived from them. Over the past year, this alternative measure has grown less strongly than the standard expenditure series. (1) See Aoki et al (2001) for more explanation of the transmission mechanism from house prices to consumption. (2) Note that the Office for National Statistics' (ONS) constant price aggregates for the United Kingdom are produced on a 'fixed-weight' basis (Office for National Statistics (1998)). That is, the components of a series (such as consumption) are aggregated using weights that are only changed at periodic intervals. The ONS is planning to introduce a ' chain-linked' system, which uses annually updated weights, with the publication of the 2003 Blue Book. The wedge between the growth rates of consumption and durables expenditure in recent years may be less pronounced in this new system. See Tuke and Reed (2001) and Whelan (2000) for further details.