Most theories of consumption place emphasis on the importance of consumer confidence in determining levels of spending.

The willingness and ability of households to finance their spending can change as the state of the economy alters. For example in an economic slowdown, the fear of rising unemployment may cause confidence to decline. Spending on "big-ticket items" such as a new car or a new kitchen may then fall.

Conversely, in a cyclical upswing we expect to see a recovery in consumer sentiment and a greater willingness to go out and commit to higher levels of spending. This was certainly apparent in 1997-98 when spending was fuelled by windfall gains and rising real incomes. Another rebound in confidence is apparent in 1999 early 2000 as the economy picks up from a slowdown in activity.

The Bank of England looks closely at the consumer confidence figures when assessing future movements in demand and output. High confidence levels may be used as evidence to raise interest rates to control the growth of household demand.  Lots of economic factors affect the overall state of consumer confidence. Some of these factors include:

·        The level of interest rates (including mortgage rates)

·        Changes in unemployment and the state of job security / insecurity

·        Expectations of inflation

·        Changes to direct and indirect taxation

·        Windfall Gains (for example arising from the stock market floatation of many former building societies)