Cost of living crisis in the UK & how we’re changing our habits

While the British economy showed a small, unexpected improvement in the last couple of months, inflation continues to be high and household incomes are under strain.

Consumers are changing their shopping habits in several different ways to cope with the cost of living crisis, and here’s a look into why and how they’re doing this.

The UK economy, inflation & living standards 

The UK has avoided technically going into recession, according to recently published figures, following two consecutive quarters of negative GDP (gross domestic product) growth. There was 0.1 per cent growth in November (market expectations were for a fall of 0.3 per cent), coupled with 0.5 per cent growth in October.

According to the British Retail Consortium (BRC), total sales rose by 6.9% in December 2022 compared with 2021, up from November’s annual growth rate of 4.2%. However, much of the rise was a result of high inflation pushing up the value of goods being sold, masking weaker sales volumes.

Consumer-related data for December was higher than forecasts suggested, possibly boosted by higher spending related to The World Cup as well as Christmas shopping and parties.

Many retailers reported increased sales of energy-saving products, warm clothing and slippers as utilities became more expensive and temperatures dropped, suggesting consumers were planning ahead during the cost of living crisis. The biggest winners in retail were budget supermarkets Lidl and Aldi.

Melanie Baker, Senior Economist at Royal London Asset Management, said: “Even if it turns out that for now the UK has escaped a technical recession, the performance of the UK economy over recent months has been poor and the economy faces a stack of challenges. The consumer still faces substantial cost of living pressures and consumer confidence remains very weak in the UK. Monetary policy has tightened a lot; we’ve had a big jump in mortgage rates and the housing market is slowing. “

Baker added: “If the economy did end the year on a stronger than expected note with a rise in GDP in December, I would worry about payback in Q1 2023, for example as consumers potentially pull back discretionary spending after Christmas.”

Both the Bank of England and OBR are currently forecasting the economy to shrink in the first half of 2023.

The Hargreaves Lansdown Savings & Resilience Barometer found that the inflation rate for the essentials is running at twice the pace of non-essentials, hitting those on lower incomes the hardest. With inflation still currently hovering in double digits and outpacing earnings growth, average consumer discretionary income eroded by a further £100 per month in November, according to the latest report from the Retail Economics-HyperJar Cost of Living Tracker. 

While it’s hoped that inflation will fall back into single figures within a few months, other issues are still likely to affect us for some time to come.

The Resolution Foundation’s ‘Living Standards Outlook 2023‘ report forecasts that typical household disposable incomes are on track to fall by 7 per cent (equivalent to £2,100 per household) over this year and next, even bigger than the 5 per cent squeeze that followed the financial crisis. It uses data from a new YouGov survey of 10,470 adults to assess how people are coping with the cost-of-living crisis this winter, and looks ahead to how the scale and nature of the crisis will evolve.

James Smith, Research Director at the Resolution Foundation, said: “Surprise economic growth in November – driven by the UK’s dominant services sector – means Britain has likely avoided a rapid return to recession in 2022. But while GDP may not have been shrinking, household incomes certainly were – and are – as families experience a deep living standards downturn.”

Household strains

According to the most recent figures from the Office for National Statistics in their report titled ‘Public opinions and social trends, Great Britain: household finances‘:

• More than one in five people are borrowing more than they did this time last year (22%).
• 8% have had a direct debit, bill or standing order they’ve been unable to pay in the past month.

Sarah Coles, Senior Personal Finance Analyst at Hargreaves Lansdown stated: “It’s crunch time for the cost-of-living crisis. After a year of shopping around and cutting back, there’s no fat left to trim from our spending, so we’re running into a brick wall financially. Many of those who can still borrow are going further into the red, while others have started missing bills.”

Coles also said: “Those who still have the ability to borrow more are often opting for this approach rather than falling behind on bills, so the number of people who are borrowing more than they did a year earlier is also trending up. In the two months to 8 January, the number of people who have borrowed more in the previous year averaged 22%. This is the highest the rolling average has been since the ONS started measuring it in November 2021. And while borrowing feels like a solution in the short-term, once you run out of capacity, you’ll face all the same challenges – plus a mountain of debt hanging over you too.”

Fuel poverty

In the report ‘Public opinions and social trends, Great Britain: household finances‘ by ONS:

• More than one in 20 are behind on their energy bills, which grows to around one in ten of those aged 16-49 and women.
• 46% of all adults surveyed currently find it very or somewhat difficult to pay their energy bills – rising to more than half of those aged 16-49 (54% among those aged 16-29 and 52% among 30-49-year-olds)
• Inability to pay has risen to 6% overall, the highest it’s been since mid-July last year.

According to ‘Kept in the Dark’, the new report from Citizens Advice:

• 3.2 million people across Great Britain ran out of credit on their prepayment meter last year because they couldn’t afford to top up – that’s one person every 10 seconds.
• Over two million people are being disconnected at least once a month.
• More than one in five (19%) prepayment meter customers cut off in the past year spent at least 24 hours without gas or electricity.

The charity has seen a 229% increase in the past year in the number of people coming for help who can’t afford to top up their prepayment meter (i.e. more people who can’t top up their prepayment meter in 2022 than in the whole of the last 10 years combined).

Based on Ofgem figures, Citizens Advice estimates that 600,000 people were forced onto a prepayment meter because they couldn’t afford their energy bills in 2022. And it predicts 160,000 more people could be moved onto a prepayment meter by the end of winter if no further action is taken. The charity is now calling for a total ban on forced prepayment meter installations until new protections are brought in.

How we’re changing to cope with the UK cost of living crisis

The most common actions reported by adults because of the rising cost of living were spending less on non-essentials (65%), and using less fuel, such as gas or electricity, in their homes (59%), according to ‘Public opinions and social trends, Great Britain: 21 December 2022 to 8 January 2023‘, from the Opinions and Lifestyle Survey by The Office for National Statistics. 

In addition, around four in 10 adults have reported shopping around more (44%) and spending less on food shopping and essentials (41%).

People are increasingly using cash again to help themselves budget too. Nationwide building society said it’s the first time in 13 years they’ve seen an increase in cash withdrawals from ATMs, with 30.2 million cash withdrawals last year, up 19% on 2021.

Otto Benz, Director of Payments at Nationwide Building Society, said: “For the first time in years we are seeing a natural rise in cash withdrawals as people return to using cash to help avoid getting into debt from the rising cost of living.”

Many larger purchases are being shelved. As reported in Retail Week, a third of UK consumers are set to cancel holidays and home improvement projects in 2023, as discretionary income continues to erode and the country faces the prospect of a long recession.

More anecdotally, consumers are thought to be planning to cut back on everyday spending such as meals out, fashion purchases and takeaways to save money. There’s also been talk of some homeowners switching to interest-only mortgages temporarily to weather the tough economic conditions, although this may cause problems further down the line towards the end of the mortgage term.

In total, around three-quarters of UK households have made large or medium-sized changes to one or more of their financial habits in the last year or so, which shows how far reaching the impact of stagnant incomes and rising prices has been. Nearly everyone is feeling the squeeze.

Have you made any recent changes in your money habits because of the cost of living crisis? Are you reducing your gas and electricity use? Looking for ways to cut your grocery bills? Buying less in total?