The latest edition of REDI-Updates is out now - providing expert data insights and clear policy guidance. In this edition, the WMREDI team investigates what factors are contributing to the cost-of-living crisis and the impact it is having on households, businesses, public services and the third sector. We also look at how the crisis in the UK compares internationally. The UK is facing the biggest fall in living standards since 1956. Juliane Schwarz looks at how this is impacting consumer behaviour. View REDI-Updates.
Analysis of consumer spending level changes over time
Consumer trends, or patterns of shopping habits, change over time and are particularly affected by events such as the Covid-19 pandemic, lockdowns and, most recently, the cost-of-living crisis. In the UK, the cost of living has been increasing since 2021 (Andrews, 2023).
The Consumer Price Index (CPI), measuring consumer prices, was more than 10% higher in July 2022 than in the previous year. Fuelled by high inflation and caused by soaring global energy prices and global supply chain struggles, UK households experienced their biggest fall in living standards in 2022 for decades. The Government forecast from March 2023 indicates that real household disposable income per capita will fall by 3.7% in the 2022/23 fiscal year, the biggest fall in living standards since 1956 (Clark, 2023). This decrease is expected to continue in 20223/24 by 2% and start to rise again by 1.7% in 2024/25.
Changes in goods and services purchases
How does the cost-of-living crisis affect consumer behaviour?
Due to a loss in purchasing power caused by high inflation and below-inflation pay rises, consumers are adjusting their spending habits by trying to spend less:
| The Resolution Foundation observes for November 2022 that three-quarters of UK adults are trying to reduce their spending overall (Brewer et.al, 2023). |
| Barclaycard (2022) analysis of credit card usage for September 2022 suggests that more than half of Brits have cut back on discretionary spending: things like restaurants, new clothes and one-off treats, in order to pay for the essentials. |
| 51% of British consumers are planning to spend evenings at home, 25% are opting to play board games, 20% stream films and box sets, and 19% play video games rather than go out. |
| Confidence index figures (GFK, 2023 and PwC, 2023.a) indicate a more pessimistic attitude towards spending. Consumers are more careful in their spending on home improvement, holidays and appliances (Curated, 2023). |
| McKinsey (2022) reports that consumers are changing to cheaper retail stores and switching to private-label alternatives. |
In their outlook for consumer spending for 2023, Deloitte (2023) projects that consumers will reduce overall spending in the first half of 2023. They predict that UK consumer confidence will improve in the second half of 2023 if inflation is gradually reduced, the national living wage increases and the labour market continues its trend of high employment. It is further assumed that consumers might continue seeking deals and buy now pay later options, brand loyalty declining, and expecting low-friction returns.
Capital borrowing trends amongst consumers
Increase in Wealth
The Money Charity (2023) statistics show that by the end of January 2023, people in the UK owned £1,837.9bn. This has increased by £70.5bn at the end of January 2022. Average earnings have increased by 0.05% to £34,546 from £34,455 in December 2022.
Decrease in Savings
Looking at UK consumer behaviour, a McKinsey (2022) survey conducted between September 23rd and October 2nd 2022, observes that consumers are putting less money into savings as they are expecting to spend more money on energy, transport, food and essentials.
Increase in Borrowing
Deloitte consumer tracker (2023) indicates that consumer credit, which includes borrowing on credit cards, car dealership finance, personal loans and overdrafts, rose by £1.5bn in November 2022, more than double the £700mn borrowed in October. The biggest driver was credit card borrowing, which jumped to £1.2bn in November from £400mn in October. Forecasts show that Household debt of all types is forecast to increase from £2,333bn to £2,478bn in 2025 by the Office of Budget Responsibility (2023).
Debt trends amongst consumers
According to the Money Charity (2023) cost of living statistics, the average total debt per UK household (including mortgage) is £65,434 in Jan 2023. This is an increase from £64,970 in June 2022.
In The Living Standards Outlook 2023, the Resolution Foundation discusses the impact of the cost-of-living crisis particularly the price increase of essentials for low-income families (Brewer et.al, 2023).
In November 2022:
| 27% of adults reported using their savings for daily living expenses in the previous four weeks. This figure has increased from 20% in June 2022 |
| 12% of workers in the lowest income quintile report selling or pawning possessions they would have preferred to keep |
| 7% have cancelled or not renewed their insurance |
| 7% say they have stopped or reduced pension contributions to save money |
In terms of debts, the pressure on family budgets means that low-income families are now twice as likely to increase their debts compared with during the Covid-19 pandemic and falling behind on bills.
- 11% of respondents, in general, said that their debts had increased moderately or substantially in the past three months
- 20% per cent amongst workers in low-income families that their debts had increased moderately or substantially in the past three months
- 10% per cent of respondents, in general, have missed at least one payment of a priority bill over the past three months
- 25% of workers in poorer households have missed at least one payment of a priority bill over the past three months
To put this into context, the constituency of Birmingham Hodge Hill is one of the most deprived areas in England (Murray, 2023). A local food bank fed 608 people in November 2022 as compared to 369 in November 2021. The new users seem to be different to people who used the service previously.
80% of new foodbank users are:
• seeking help for the first time in their lives.
• are in work and employment
• seem to be able to cover their rents with their income
• but they seem not to be able to feed themselves and their family
• and experience fuel poverty, of which the West Midlands experience with 19.2%
the highest rate nationwide in the winter of 2022 (Sandiford and McRae, 2023).
Changes to employment
The unemployment rate remains unchanged in the second half of 2022 and is at a 50-year low. The labour market is strong with an unemployment rate of 3.7% for the three months to November. However, this does not seem to reassure consumers regarding their job security. The Deloitte Consumer Tracker (2022) observes for the fourth quarter of 2022 that consumers are increasingly concerned about a possible deterioration in the job market. Consumer sentiment on job security has declined by 1.2% to -10% compared to the previous quarter.
This seems to affect the way consumers regard their employment. The PwC Consumer Sentiment Survey (2023.b) indicates that in Spring 58% of all respondents would take a more secure job that pays less. Looking at 18 to 34 years old, this is slightly less. Only 51% of this age group responded that they would value security more than income.
Employment and the kind of jobs consumers are looking for are also affected by the cost-of-living crisis. Due to a squeeze in finance both for employees and employers, the job market has radically changed in less than a year:
| 75.1% of UK professionals have considered looking to change jobs because of rising costs in April 2022 according to the online recruiter (CV-Library, 2022) |
| 17% of all workers have had to take a second job to boost income, including 1 in 5 essential workers in February 2022 according to (TotalJobs, 2022). December saw 1.25 million people with second jobs, according to ONS (2022) data an increase of 43,000 |
| 10% decrease in economically inactive people from August to October 2022, largely driven by those aged 50 to 64 years returning to work |
| 11.9%decrease of economically inactive people in August to October 2022 aged 50 to 64 |
Changes to accommodation
According to ONS (2023) data, average house prices in the UK increased by 6.3% in the 12 months to January 2023. The average UK house price was £290,000 in January 2023, which is £17,000 higher than 12 months ago. Regionally, London remains the most expensive of any region in the UK, with an average price of £534,000 in January 2023.
Between June and July 2022, average house prices in the UK grew the most in the West Midlands (3.8%), followed by the North East (3.7%). The smallest monthly growth was experienced in the East Midlands (0.6%). The region with the largest growth in average house prices since July 2021 was the South West.
As of September 2022, Rightmove reports that the average price of new properties coming to the UK housing market was around £367,000 (0.7% on the previous month).
- The housing market seems to remain robust given the economic factors that have affected home-movers.
- House sellers are continuing to raise their asking prices, despite higher interest rates and a rising cost of living. On average, this equated to more than £2,500 a property.
Rents remain consistently high in March 2023 according to Goodlord Rental Index (2023). This is mainly due to high demand and low housing stock. The average cost of a rental property in England is £1,090.57, an increase of 0.14%. Most regions saw a negligible shift in prices. The biggest change was recorded in the East Midlands, where prices decreased by 2.8%. In the South West, however, prices rose by 2.4%. In the West Midlands, rents increased from £893.30 by 1.38% in February 2023 to 905.59 in March 2023.
Tenants seem to be more cautious about moving to another rented property if they’re already renting. This is due to the rising price of rent, which may make moving more expensive, and to the extra costs involved with moving, such as hiring vans and security deposit payments. Tenants may start to downsize if they decide to move. This is in contrast to tenants upsizing during the pandemic.
A trend that shows tenants relying on their parents for support with accommodation costs seems to continue. According to Saga Equity Release (2022) in October 2020 one in five parents was financially supporting their adult children to cover accommodation and other costs of living, in May 2022 this has grown to one in four. Parents seem to be gifting sums of money or releasing equity from their homes which might make them more financially vulnerable.
Summary
The dramatic increase in the cost of living since 2021 is having a considerable impact on consumers as real household disposable income per capita has seen a sharp decline leading to the biggest fall in living standards since 1956. As a result, consumers have reduced overall spending, a trend that might continue for the first half of 2023. If, however, inflation is gradually reduced, the national living wage increased, and high employment continues, consumer confidence might improve in the second half of 2023.
As a result of the cost-of-living crisis, consumers have become more discerning in the way they spend their money. In order to pay for essential goods, they cut back on eating out, new clothes and one-off treats. They are more careful in spending on home improvements, holidays and appliances and switch to cheaper stores and private-label alternatives. Less money is available to put into savings.
Borrowing, especially borrowing on credit cards, has increased alarmingly affecting an increase in total debt per UK household. Low-income households are particularly vulnerable with their debt level increasing and some not being able to pay priority bills. Foodbanks experience an increase in demand and report that people who are in employment and previously donated food are using their services now.
Employment and the kind of jobs consumers are looking for are also affected by the cost-of-living crisis. UK professionals considering changing jobs because of rising costs and the number of workers who have a second job has increased. The number of economically inactive people, however, has decreased driven by workers over 50 returning to work.
The housing market remains robust and rents are consistently high with tenants less likely to move or, if they do, downsize. Parents are increasingly drawn upon to help cover their adult children’s accommodation and other costs of living.
View and download the full REDI Updates report.
This blog was written by Dr Juliane Schwarz, Research Fellow, City-REDI, University of Birmingham.
Disclaimer:
The views expressed in this analysis post are those of the authors and not necessarily those of City-REDI or the University of Birmingham.
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