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Our latest survey of British household finances shows that households are responding to the cost of living in different ways. In particular, higher-income households are reducing their monthly savings to reduce spending.
Households are generally facing significantly higher costs in the goods and services they purchase. Prices for consumers have increased by about 11% in the last year. They face a choice between spending more money to buy the same things they used to or cutting back on some purchases. The extent to which households cut consumption will be an important determinant of how much the UK economy slows.
Household surveys can help assess this. The Bank of England conducts a biannual household survey with NMG Consulting to obtain data on households’ financial circumstances and their economic expectations. The most recent wave of NMG surveys was conducted between 30 August and 17 September 2022. In this survey, more than 70% of respondents have experienced an increase in the cost of the goods and services they usually purchase in the past six months.
Households across the income distribution are responding differently to rising costs. Low-income households have mostly tried to limit their spending increases by reducing the amount of goods and services they buy or by switching to cheaper substitutes. Meanwhile, higher-income households continued to consume the same goods or increased their purchases and therefore spent more overall (Chart A).
Chart A: Low-income households were more likely to spend less because of rising living costs (a)
Footnotes
- Sources: Bank of England, NMG Consulting and bank calculations.
- (a) Proportion of respondents answering how their total expenditure has been affected by an increase in the cost of living in the past six months. The survey was conducted from 30 August to 17 September 2022, with 4,336 responses to this question. Excludes respondents who answered ‘don’t know’.
Households that spend more money typically fund this additional spending by saving less. More than half of respondents who overspent put aside less of their income each month, and a quarter drew on existing savings. One in 12 households said a salary increase helped them fund higher expenses, while about 5% of households said they increased borrowing to pay for more (Chart B).
Chart B: Households that have increased spending mainly fund this by saving less (a)
Footnotes
- Sources: Bank of England, NMG Consulting and bank calculations.
- (a) Proportion of respondents answering how they funded additional expenses following an increase in the cost of living. The survey was conducted from 30 August to 17 September 2022 with 2,844 responses to this question.
Overall, although the data suggest that many households – especially those with higher incomes – are saving to offset the impact of higher spending on their spending, the overall decline in households’ real incomes is weighing on aggregate consumption (see Section 2.3. November 2022 Monetary Policy Report).
This post was prepared with the help of Christoph Herler and James Tasker.
The analysis was presented to the Monetary Policy Committee in October 2022.
We have published Bank of England/NMG household survey data from 2004 to 2022.
Share your thoughts with us at BankOverground@bankofengland.co.uk
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