Even though inflation is down to 2% this year, consumers are still cutting back on their non-essential purchases, including eating out, buying takeaway food and clothes.
KPMG’s latest figures show that after two years of rising prices and a squeeze on the cost of living, four out of ten British households have reduced their discretionary spending. Only a little under half of the respondents said that their non-essential expenditures were unchanged in 2018.
Linda Ellett is the head of consumer and retail for KPMG in UK. She said that households are finding ways to adapt to or prepare themselves for cost increases, such as an increase in rent or a remortgage.
Ellett stated that “slowing inflation doesn’t mean consumers will see a decrease in prices or costs, and the overall squeeze continues on many monthly budgets.”
The Bank of England has reduced consumer price inflation to its 2 percent target for the very first time since the year 2021. This is a rapid decline from the 11,1 percent peak reached in October 2022. Falling prices mean that average wages have now grown in real terms following a decline in household disposable income between 2022 and 2023.
Three years of high inflation has seen interest rates rise from a little over 0% to 5.25 %, which adds around £2,000 per year to the average mortgage bill. According to Bank projections, interest rates will fall slowly this year to settle at about 3.5 percent by 2026.
KPMG reported that the most popular areas for saving this year were restaurants, take-outs, clothing, beauty products, and subscription streaming services. About 5 percent of consumers reported that they made larger monthly savings, amounting to £200.
Under a third (about 3,000) of consumers surveyed indicated that they would switch to cheaper brands, buy more discounted and promotional items, and use loyalty reward schemes in order to save money. Over a third said that they would use their savings to pay for a vacation, and a quarter would spend them on home improvements.
Ellett stated that “major purchases are still not popular.” “Consumer confidence in their financial situation and security is clearly divided.” The next government will face this landscape as it develops its future economic policy.
Retail sales and consumer spending are two of the main drivers of the UK’s economy. The UK is heavily dependent on the employment and output of the services sector. Retail sales volume fell by more than 2% in April, contributing to a flat growth of the monthly GDP. Most economists predict a gradual improvement in consumer spending, which will help power a modest recovery of 0.7% of GDP.
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