A view from London
To stop inflation in its tracks, central banks have to prevent higher inflation feeding through into ever higher prices and wages
By Ian Stewart, Deloitte
With UK inflation at the highest level in 40 years and set to hit the 10% mark later this year, households are seeing an acute squeeze on spending power. On Friday, the polling group GfK reported that their measure of UK consumer confidence had dropped to the lowest level since the series started in 1974.
High inflation is hitting lower-income households the hardest. Lower-income households spend a higher share of their incomes on energy and food, whose prices are rising rapidly. The Institute for Fiscal Studies estimates that headline inflation of 9% translates into an effective rate of 11% for the bottom 10% of earners and an inflation rate of around 8% for the top 10%. Indeed, higher-income earners are better placed on all counts – with lower inflation, faster growth in pay, higher levels of saving and lower levels of unemployment than lower-income consumers. Averages conceal these vital distributional effects.
Falling real incomes point to a squeeze on non-essential and ‘big ticket’ spending. In an IPSOS Mori survey of consumers across 11 developed nations, spending less on socialising and holidays, and delaying big ticket purchases featured at the top of their list of responses to the rising cost of living.
Online retail and price comparison websites make it easier for consumers to seek out the lowest prices. In another survey by IPSOS Mori, 39% of British respondents reported using a price comparison website to look for cheaper energy suppliers and 44% reported switching their regular supermarket for a cheaper alternative this year. The latter strategy was particularly popular in the aftermath of the financial crisis, allowing German discounters to win substantial market share from some of the biggest British supermarkets.
Consumers also say they are cutting back on heating and electricity. Around two in three Britons report not turning on their heating when they usually would have this year.
