Due to high inflation in the UK, the British spent less and saved more

Britain's nearly three-year-long inflation shock has reshaped the country and changed people's spending and saving habits, new research shows.

A report by the Resolution Foundation examined the extent of Britain's inflation spike and its impact on living standards, spending habits and public finances.

The UK inflation shock, which saw the Consumer Price Index (CPI) reach its highest level in more than four decades at 11.1% in October 2022, was the strongest among G7 economies. It was also the third strongest among advanced OECD countries, with only Sweden and Iceland being hit harder.

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Since March 2021, prices have risen by a total of 22 percent, 15 percent more than they would have if inflation had remained at its target of two percent. The UK has squeezed over a decade's normal inflation rate into just three years.

The cost of essential goods has risen far more sharply – energy costs by 90 percent and food by 31 percent. This means that poorer families are hit hardest by the cost of living crisis, as they spend 50 percent more of their total expenditure on these goods than richer households.

Despite expectations that households would use up their savings or borrow to cope with higher prices, the foundation said the cost of living crisis had turned Britain from a nation of spendthrifts into a nation of savers, as households had cut back on consumption more than their incomes had fallen.

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Real disposable household income per person has fallen by 1.1%, or £280 per year, since before the Covid-19 pandemic, but real consumption per person has fallen by 4.7%, or £1,200 per year.

In the last three months of 2023, families saved 6% of their disposable income – the highest percentage in over 30 years outside of the pandemic. If they had saved at 2019 levels, this would have increased total spending by £54 billion a year.

The surprise surge in savings has led households to drastically reduce their consumption during the cost of living crisis, including on energy (down 11%) and food (down 7%). Spending on luxury goods also fell, including household appliances such as refrigerators and tableware (down 18%).

This comes as official data next Wednesday will show inflation moving close to the Bank of England's 2% target for the first time since July 2021.

Although inflation is finally approaching the target again, the effects of the recent inflation shock will linger for a long time, according to the foundation.

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James Smith, head of research at the Resolution Foundation, said: “Next week, headline inflation should finally return to normal levels, marking the end of the UK's biggest rise in inflation in more than four decades. The sheer scale of this almost three-year-long inflation shock has reshaped the economy and public finances, and changed what people do with their money.

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“The crisis has made us poorer, with sharp rises in the cost of essential goods hitting lower-income families hardest. It has also turned us from a nation of spendthrifts to a nation of savers, with credit card spending down 13% and families saving around £54 billion more a year than we would have expected.

“Even though this phase of high inflation is largely behind us, its consequences will be felt long into the future: national debt has increased instead of being reduced by inflation as in the past.”

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