Cost of living crisis eroding household income by £2,300

The typical UK household will be £2,300 worse off in real terms, by the time the cost of living crisis comes to an end, according to a new study. Assuming the crisis does come to an end by the finish of 2024, that would wipe out £65 billion from household spending power, drastically impacting the national economy’s potential for growth in the coming years.

After 12 months of double-digit inflation, the UK’s Consumer Prices Index is finally seeing price increases slow. The CPI rose by 8.7% in the 12 months leading to May 2023, and in June that eased further to 7.9%. But it is important to note that this does not mean prices are falling – a common misconception – rather that they are growing at a (still high) rate, on top of a peak that was already its most in four decades. Add to that the fact wage growth in May 2023 was found by the Office for National Statistics to have been 7.3%, and the UK’s average worker still endured a pay-cut in real-terms – further decreasing household spending power.

At the same time, the Bank of England is continuing to raise interest rates – a move it asserts that will drive inflation down, against others who believe the manoeuvre only obfuscates the causes of inflation – placing pressure on households looking to borrow money to make ends meet. As a result, with fewer and fewer options on the table, most UK consumers have continued to scale back their spending on all fronts – leading to faltering economic growth for the country as a whole.

Now, a new study from Grant Thornton and Retail Economics has outlined the troubling long-term cost this may have to the economy. Earning increases won’t sufficiently outpace inflation by enough to raise real-term earnings until the middle of 2024. Earning increases will first outpace inflation in April 2024, but in the time until then, most households will have endured a major loss of their spending power.

Based on current projections, the study believes that over the 31 months from October 2021 to May 2024, the cost of living crisis will leave the typical household over £2,300 worse off. In total, this is forecast to wipe out £65 billion from household spending power, based on economic modelling within the report – as the changing dynamics of the crisis have also eaten into the funding of the most financially stable homes.

Richard Lim, CEO at Retail Economics, explained, “The relentless rise in interest rates has completely changed the narrative around the cost of living crisis. What started as a crisis among the least affluent households has evolved to capture a much wider array of income groups as housing affordability comes under enormous pressure. As pandemic savings have been whittled away, the squeeze on finances has become a war of attrition for many households. While peak inflation may have passed, households still have around 10 months of pain to come where cutting back spending will intensify for many households.”

In line with that assessment, the study found that the ways in which households are economising is changing dramatically. In 2022, 14% suggested they had no plans to cut spending at all – and that has now fallen to 12%. But even more alarmingly, a majority of consumers are now cutting back on most or all of their spending.

In 2022, 34% said they would spend less in ‘some areas’ – discretionary or ‘non-essential’ spending. But that is now 23% - behind 30%, who say they will reduce most spending, and 35% who will slash all spending – 11% more than one year before. With profit warnings and insolvencies already having surged in the UK, with consumers spending less, this outlook could see economic growth – a minimal 0.3% according to recent estimations from KPMG – could slip closer to shrinkage, and recession.

Nicola Sartori, the head of M&A retail and consumer at Grant Thornton UK, added, “The 'Cut Back Economy' continues to exert its unyielding influence on consumer behaviour, presenting formidable challenges for retail, leisure, and hospitality businesses.  Consumer confidence remains fragile, as the intention to cut back on non-essential purchases continues. The way that customers research and decide how to buy has become more complex, and people are still prioritising online to find good deals and manage spending. To navigate this uncertainty, it is crucial for businesses to build this changing consumer behaviour into their long-term strategies.”