How will households weather the cost of living storm?

David Wylie

David Wylie

The escalating cost of living crisis is undoubtedly going to put considerable stress on household finances. 

I need not repeat all the figures here, but the most alarming is easily the energy price cap. For a typical household, the price cap – already increased to £1,971 on April 1 – rose again on October 1 to the government’s £2,500 ceiling. 

It goes without saying that the impact of this is going to be dramatic, given that energy will not be the only thing people will be paying more for – add into the mix shop prices, transport, council tax and water bills, which are all set to rise in line with inflation.

Article continues after advert

Also, consider the fact that this is a ‘typical’ energy bill, not an average or even median bill. There will be many for whom this figure significantly undercuts reality.

Four remedies

Faced with such ballooning outgoings, what are households going to do?

If we look to previous periods of inflation and financial hardship, we find that they are likely to turn to one or more of four key remedies: cutting back on spending; falling into arrears with household bills; more borrowing; or defaulting on existing credit arrangements. 

Thankfully, for most households these remedies will likely not be called on. For them, the inflation shock will be uncomfortable but bearable.

The latest figures show median household disposable income in the UK was £31,400, according to the Office for National Statistics, and so, unless heavily indebted, this will be sufficient to weather the storm. 

It is the remaining households, and specifically those with a disposable income of less than £19,500, who will be increasingly turning to one or more of these four options over the coming months. 

In contrast to previous downturns, however, they may not prove to be as helpful as before.

Cutting back on spending – traditionally the first target for consumers – is going to be trickier this time round. 

Disposable incomes have been shrinking. There was a record 18 per cent drop in average household disposable income in June 2022 compared to the same month in 2021, according to the Asda Income Tracker collated by the Centre for Business and Economic Research.

After paying tax and essential bills, the average household had £200 a week left – a figure that has fallen for eight consecutive months to a level not seen since December 2017.

At this comparatively low level, discretionary spending on items such as eating out and shopping will come under the spotlight as well as gym memberships and streaming services. 

But if option one is not enough, more households are going to consider falling into arrears on household bills. 

Once those with stiff civil penalties for non-payment such as council tax are discounted, they may take the decision to cancel their direct debits.