Cost of living crisis to wipe £65bn from household finances

Inflation and the cost of living crisis are set to wipe £65bn from household finances across the UK, with real earnings not expected to return to growth until May 2024, according to a new report from Grant Thornton and Retail Economics.

The report, which asked 2,000 adult consumers in the UK about their spending priorities and plans, found that the average household will be £2,300 worse off by the end of this financial year.

It added that the “spiralling” cost of food, energy and other daily expenses has already cost UK households £50bn in lost income.

In light of the ongoing cost of living crisis, the report found that 88% of UK consumers now plan to cut back their spending to April 2024, while over half (54%) have cut back on discretionary purchases, a slightly higher figure than last year (48%).

In addition, 69% of consumers are spending more time trying to find the best deals, while one-in-three have changed where they shop for regular purchases, switching to cheaper brands or retailers.

According to Grant Thornton and Retail Economics, the £54bn online shopping boost seen during the pandemic “proved temporary”, with normal trends now resuming.

The report also found that while inflation has fallen from double-digit highs as wholesale energy prices retreat, it is now not expected to return to the Bank of England’s 2.0% target until 2025.

Grant Thornton and Retail Economics warned that even when inflation slows, the proportion households spend on food and energy will remain “significantly higher” than two years ago, adding that this will have long term implications on levels and distribution of discretionary spending.

Nicola Sartori, head of Consumer, Grant Thornton UK, said: “I wish I could write that this year’s data shows that cut back behaviours are reducing and confidence is returning. If anything, however, this research shows a widening crisis that businesses need to handle through a multi-stage strategy. 

“The news cycle has been dominated by headline inflation figures that are proving difficult to shift. Our report estimates that inflation will erode £65bn of household income, with the average household £2,300 worse off by the end of this financial year. The difference between now and last year? More middle and higher-income households are being drawn into this widening crisis as savings dwindle and mortgage rate rises bite.”