Yahoo Finance UK inflation highs saw Brits spending less and saving more
The UK's near three-year inflation shock has reshaped the country, changing people’s spending and saving behaviour, new research shows.
A report from the Resolution Foundation examined the scale of Britain’s inflation highs and how it has affected living standards, spending behaviour and public finances.
The UK’s inflation shock, during which the consumer price index (CPI) peaked at 11.1% in October 2022, the highest in more than four decades, was the biggest among the G7 economies. It was also the third highest among OECD advanced countries, behind only Sweden and Iceland.
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Since March 2021, overall prices have risen by 22%, 15% higher than they would have been had inflation remained at its 2% target, with the UK squeezing over a decade’s worth of normal inflation into just three years.
The cost of essentials has risen far more – with energy up 90% and food up 31% over this period. This put poorer families at the heart of the cost of living crisis, as they spend 50% more of their total spending on these items, compared to richer households.
Despite expectations that households would run down savings, or borrow, to cope with higher prices, the Foundation said the cost of living crisis has turned Britain from a nation of spenders to savers, as households have cut their consumption by more than their incomes have fallen.
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Real household disposable income per person has fallen by 1.1%, or £280 a year, since before the COVID-19 pandemic, but real consumption per person has dropped 4.7% or £1,200 a year.
In the last three months of 2023, families saved 6% of their disposable incomes – the highest rate, outside of the pandemic, in over 30 years. Had they saved at 2019 levels, this would have boosted aggregate spending by £54bn a year.
The surprise savings boost has seen households cut down sharply on the amount they consume during the cost of living crisis, including on energy (down 11%) and food (down 7%). Spending on luxury items also declined, including household appliances, such as fridges and crockery (a fall of 18%).
This comes as official data next Wednesday is set to show inflation returning to close to the Bank of England's 2% target for the first time since July 2021.
While inflation is finally returning to target, the impact of the recent inflation shock will cast a long shadow, the Foundation said.
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James Smith, research director at the Resolution Foundation, said: “Next week, headline inflation should finally return to normal levels, marking the end of the UK’s biggest inflation surge in more than four decades. The sheer scale of this near three-year inflation shock has reshaped the economy and public finances and changed what people do with their money.
“The crisis has made us poorer, with the sharp rise in the cost of essentials hitting lower-income families hardest. It has also turned us from a nation of spenders to a nation of savers, with credit card spending falling by 13% and families saving around £54bn a year more than we might have expected.
“While this high inflation phase may be largely behind us, its legacy will be felt well into the future, with national debt having increased, rather than being inflated away as we have seen in the past.”
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