The Resolution Foundation has unveiled that the United Kingdom’s struggle with the high cost of living has transformed the spending habits of its populace, leading to a shift towards saving rather than spending. The cost of living crisis has had a substantial impact on how households manage their finances, resulting in decreased consumption even more than the decline in incomes.
With the Consumer Prices Index (CPI) inflation for April anticipated to closely align with the Bank of England’s 2 percent target, the Foundation has highlighted the effects of the inflation squeeze on living standards, spending behaviour, and finances during this turbulent period of price volatility. It was noted that CPI inflation reached its peak at 11.1 percent in October 2022 and has subsequently seen an overall price increase of 22 percent.
Furthermore, the Foundation revealed that real household disposable income per person has decreased by 1.1 percent (equivalent to £280 a year) since the fourth quarter of 2019, just prior to the coronavirus pandemic. However, real consumption per person has experienced a steeper decline of 4.7 percent (equivalent to £1,200 a year). Additionally, families have notably increased their savings, reaching a rate of 6 percent of disposable incomes – the highest level outside of the pandemic in over 30 years.
The report highlighted that despite the headline inflation rate returning to normal, the UK has still undergone a significant inflation shock, particularly impacting lower-income families who allocate a larger portion of their income towards essentials. This has resulted in a transformation of the nation’s spending habits, with credit card spending decreasing by 13 percent, and families saving approximately £54 billion more per year than anticipated.
The Foundation also pointed out that the recent inflation shock has led to an increase in the national debt, rather than adhering to the historical trend of inflation shocks diminishing the national debt. The impact of this inflation shock is expected to have long-term implications, despite the return of inflation to target levels.
James Smith, Research Director at the Resolution Foundation, underscored that while headline inflation is projected to return to normal levels, the crisis has lead to decreased wealth among households, particularly affecting lower-income families. Additionally, the high cost of essentials has played a pivotal role in reshaping the nation’s spending habits, transitioning it from a society of spenders to a society of savers. Smith also emphasized the enduring impact of the inflation shock, which will continue to be felt in the future, especially in the form of increased national debt.
In conclusion, the high cost of living crisis has brought about significant changes in the spending behaviour of UK households, resulting in a society of savers rather than spenders. While the return to normal inflation levels is a positive development, the lasting implications of the recent inflation shock will continue to exert influence on the economy and public finances for the foreseeable future.