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The Cost of Living Crisis: The Effect on Different Consumers

Full report: The Cut Back Economy & Cost of Living Crisis

The Cost of Living Crisis: The Effect on Different Consumers

This article is part one of our four-part mini-series, derived from our report in partnership with Grant Thornton 'The Cut Back Economy,' which explores the impact of the cost-of-living crisis on the UK retail, leisure, and consumer sectors. Our research shows that nearly 90% of UK consumers will need to reduce their spending on non-essentials. 

 

5 minute read

 

The UK economy is facing severe headwinds due to soaring inflation, slower growth, and tightening monetary policy. This is occurring amidst heightened geopolitical tension, and emerging from a global pandemic has only provided temporary relief. Economic volatility is the new reality for many households, with the sharpest squeeze on disposable incomes in generations leading to fears of an oncoming recession.

 

Stagflation is evident in high unemployment rates and slow economic growth, coupled with rising inflation. Inflation is currently at a 40-year high and is expected to reach 11% by the end of 2022 due to an increase in the energy price cap. This level of inflation is unprecedented for most consumers. The Bank of England has raised interest rates for the fifth consecutive time in June 2022 to balance inflation control and economic growth. Initially thought to be a transitory reopening effect after the pandemic, inflation has risen more persistently due to global supply chain distortions, Brexit's softening impact on trade flows, and higher commodity prices. This situation has also led to a decline in consumer confidence.

 

As a result of their budgets being squeezed, many consumers will be forced to adopt recessionary behaviours such as saving less, trading down, or cutting back on spending. A significant percentage of consumers (41%) expect this squeeze on living standards to impact their spending habits until at least the end of 2023, which could have negative implications for the retail, leisure industries, and wider economy.

 

Household Polarisation

The cost-of-living crisis affects households differently, with those on lower incomes or with debt being more vulnerable to inflationary shocks due to a lack of savings. The least affluent spend close to two thirds of their budget on staples like food and energy, while the most affluent spend less than half. Our research shows that the least affluent are experiencing inflation at a rate of almost 12%, compared to around 9% for the wealthiest households.

 

Fig 1: In May 2022 less affluent households inflation rates were 2.6% higher than more affluent households

cost of living crisis

Source: Retail Economics

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Cut Back Cohorts

Our research reveals four consumer cut back archetypes, based on how UK households perceive the cost-of-living crisis and resultant changes in their spending behaviour.

 

Fig 2: 36% of households are financially distressed

cost of living crisis

Source: Retail Economics

 

 

Financially Distressed - 

This group tends to be under the age of 45 and is financially insecure, with low incomes and/or high debt levels. They intend to cut back on most (if not all) non-essential spending due to rising living costs. For them, cutting back is a necessity rather than a choice, and they are already resorting to extreme measures to afford bills and everyday needs. Financially Distressed consumers are twice as likely to have used a food bank, taken on additional work, or cut back on meals in the last six months.

 

The cost of living crisis

 

Squeezed Spenders- 

This group is also financially squeezed, but tends to be less concerned by the rising cost of living. They are more likely to dip into savings, increase borrowing, or use buy-now-pay-later schemes for non-essential purchases. Squeezed Spenders tend to live in the moment and are reluctant to make cutbacks, even though they recognize that it may become necessary. They are typically urban and middle-income, and cover a range of ages.

 

cost of living crisis

 

Comfortable Cautious- 

This group is financially secure, but the rising cost of living is still a concern on an emotional level. They tend to be middle-to-higher income households, often with children. Comfortable Cautious consumers are risk-averse and prefer a considered approach to spending, consciously looking for deals and switching to cheaper brands to cut back on some of their spending. However, they also have the financial means to make big-ticket purchases. For example, most Comfortable Cautious consumers plan to go ahead with their holiday plans in 2022, unlike the Financially Distressed and Squeezed Spender groups that are less financially stable.

 

cost of living crisis

 

Financially Immune -

This group consists of affluent consumers who have not been financially or psychologically affected by the cost of living crisis, and have no plans to cut back on spending. They are most likely over the age of 45, with high incomes and significant savings accumulated during their working life. Financially Immune consumers have a financial safety net that was further bolstered during the pandemic from fewer travel and social occasions.

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Found this short article interesting?

This article is the first in a four part mini-series from our report 'The Cut Back Economy'

 

  • Part two can be found here
  • Part three can be found here
  • Part four can be found here
View Full Report Here

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