Inflation forcing UK residents to spend savings

Spiralling rates of inflation, sustained wage stagnation, and the continued economic impacts of the pandemic mean many UK residents are having to burn through savings to stay afloat. A new survey has found that one-in-four consumers expect to spend savings in the coming months.

The Consumer Prices Index (CPI) indicated an inflation rate of 5.5% in the 12 months to January 2022. Issues with this mode of inflation reporting have been widely discussed in the past months, with critics noting that the model does not illustrate how inflation impacts people with lower incomes disproportionately more heavily. Food poverty campaigner Jack Monroe, for example, noted that the price of many necessities relied upon by consumers with the lowest incomes had risen by over 300% in a year.

However, even without this, 5.5% is the highest CPI 12-month inflation rate in the National Statistic series, which began in January 1997. The last time it was higher in the historical modelled series was March 1992, when it stood at 7.1%.

Alongside spiralling food costs, households across the UK are enduring a calamitous boom in energy prices. The news has seen a £700-a-year-plus increase on the cards for millions, and is supposedly due to the rising cost of wholesale gas – even as companies like British Gas report record profits.

Amid the increasingly hostile economic outlook, British consumers are dipping into their savings to keep their heads above water. According to a new study of 1,000 UK adults by financial app Claro Money, 28% of consumers are facing spending their ‘rainy day’ funds, as their outgoings rise above their income. These funds are typically saved for goals like remodelling the family home, purchasing a new car, or going on holiday, according to the researchers – and their being spent on the rising cost of daily living including food shopping, childcare, petrol, and energy will likely have wide-ranging implications for the UK economy.

Official figures show the Bank of England’s estimate for GDP growth next year was recently downgraded to 1.25%. If consumers cut back on spending further, this could slow further – and stall the UK’s attempts to rebound from the Covid-19 recession of 2020. According to Claro Money, men were less likely to scale back on spending, and the largest portion of 31% would spend savings before doing so – but a larger 39% of women said they would sooner scale back on spending.

For those looking to maintain spending and savings, meanwhile, many are looking to lenders – a risky strategy in its own right. As was the case before the 2008 recession, credit cards are regularly being utilised by UK residents as a way to pay the bills, in lieu of salaries rising with inflation. Around one-tenth of consumers are choosing this option. Meanwhile, 10% of respondents had already had to ask friends and family to loan them money or food in hard times. This rose to 15% among those with children or dependents.

Other options are few and far between for most consumers. The study found 15% would choose to sell something they own to make up income shortfalls – but working overtime to bring in more money each month was only an option for 12%. 

Sarah Brill, Financial Coach at Claro Money, commented, “It’s such a shame to see hard work go to waste as savings are being called upon to meet the daily cost of living with inflation increases at a 30-year high… Turning to savings when we have them is fine, but we would urge people to practice mindful spending. This means making a note of what you take out of your savings account and making a realistic plan to replace this when you can. Without doing this, it can be easy to deplete funds entirely and have nothing to fall back on, feeling deflated and unmotivated to get back into good money habits like having savings and making those future finance goals to benefit us later in life.”