Households responded to the largest surge in inflation in decades by ramping up their savings rather than increasing borrowing, new research from the Resolution Foundation shows.
Since March 2021, prices have increased by 22 per cent in the UK with a peak annual inflation rate of 11.1 per cent in October 2022.
This means the UK has suffered one of the worst bouts of inflation among OECD countries.
Source: Resolution Foundation
Rather than running down savings or borrowing to cope with higher prices, households have cut back on spending. Since the pandemic, real household disposable income per person has fallen by 1.1 per cent while real consumption per person has dropped 4.7 per cent.
The analysis showed that households have cut spending on both essentials and luxury products compared to levels at the start of 2022. Spending on energy and food fell 11 per cent and seven per cent respectively. Spending on delayable purchases, like household appliances, has dropped 18 per cent.
As spending has decreased, savings – the difference between disposable income and consumption – has increased significantly.
This will partly reflect the increase in interest rates, which has made it much more attractive for households to save relative to recent years when rates were near zero.
In the final quarter of 2023, UK households saved 6.0 per cent of disposable income, nearly double the savings rate in the first quarter of 2022 and the highest level of savings since 1993, excluding the pandemic.
If savings had remained at the 2019 levels, aggregate spending would have been lifted by £54bn.
“Inflation has also turned us from a nation of spenders to a nation of savers, with credit card spending falling by 13 per cent, and families saving around £54bn a year more than we might have expected,” James Smith, research director at the Resolution Foundation, said.
Looking internationally, economies which have seen an increase in savings relative to pre-pandemic levels have seen slower rates of economic growth.
“This is consistent with the idea that the UK’s sluggish post-pandemic recovery is a key factor behind the recent rise in saving,” the think tank said.
Source: Resolution Foundation