The recent escalation in the cost of living has had a profound impact on the spending patterns of households in the United Kingdom, leading to a shift from consumption to saving. According to the Resolution Foundation, the persistent struggle with the cost of living has resulted in a reduction in consumption, surpassing 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 conducted an analysis of the effects of the inflation squeeze on living standards, spending behaviour, and finances during this tumultuous period of price fluctuation.
The research indicates that CPI inflation peaked at 11.1 percent in October 2022, and overall prices have surged by 22 percent since March 2021. However, there has been a slight decrease in CPI inflation to 3.2 percent in the 12 months leading to March 2024, as opposed to 3.4 percent in February.
The Foundation, with a focus on improving living standards for low to middle-income individuals, emphasized that the surge in inflation has significantly impacted the cost of essential items, placing a heavier burden on poorer households. Consequently, households have notably decreased their consumption during the ongoing cost-of-living crisis.
The depreciation of earnings’ value due to the inflation surge has led to a 1.1 percent decline in real household disposable income per person since the fourth quarter of 2019. Meanwhile, real consumption per person has experienced a more substantial decrease of 4.7 percent. This escalating financial strain has prompted families to save 6 percent of their disposable incomes in the last three months of 2023 – the highest rate witnessed outside of the pandemic in over 30 years.
Although the recent alleviation of the squeeze has permitted households to increase their spending on leisure activities and travel, the spending on goods has not exhibited a similar recovery. Additionally, the United Kingdom has encountered an unprecedented occurrence where inflation shocks have not reduced the national debt, contrary to historical trends.
While there is optimism regarding the gradual return of inflation to the target levels, the long-term repercussions of the recent inflation shock are expected to linger. The Research Director at the Resolution Foundation, James Smith, highlighted that the inflation surge has not only reshaped the economy and public finances but has also had a profound impact on consumer behaviour.
Smith emphasized that the crisis has resulted in a substantial reduction in credit card spending, an increase in household savings, and has contributed to an overall decrease in the nation’s wealth. Despite the potential conclusion of the high inflation phase, the enduring effects of increased national debt and altered spending habits are likely to endure into the future.
In conclusion, the ongoing cost-of-living crisis has precipitated a fundamental transformation in household spending habits, affecting the economy, public finances, and the overall welfare of individuals throughout the United Kingdom.