UK consumer confidence has dropped to its lowest level in 11 months as people worry about surging inflation and fuel bills, suggesting that rising living costs will slow the household spending recovery.
The UK consumer confidence index, a closely watched measure of how people view their personal finances and wider economic prospects, fell four points to minus 19 in January, according to research company GfK.
This was the lowest reading since February 2021, when the country was in a strict lockdown, and below analysts’ expectations of no change from the previous month.
Joe Staton, client strategy director at GfK, said that “despite some good news about the easing of Covid restrictions, consumers are clearly bracing themselves for surging inflation, rising fuel bills and the prospect of interest rate rises”.
All the components of the index deteriorated. However, the fall in consumers’ expectations about their personal financial situation for the year ahead and the sharp decline in the proportion of people who think this is a good time to make major purchases were particularly worrying for the pace of the UK recovery because they are more closely linked with personal spending patterns.
“The four-point fall in the major purchase index certainly suggests people are ready to tighten their belts,” said Staton.
Consumer spending has been a major driver of the UK economic recovery. In the third quarter, household consumption made the largest contribution to economic growth, accounting for 1.2 percentage points of the 1.3 per cent quarter-on-quarter expansion in gross domestic product.
The GfK index, based on interviews carried out between January 4 and 12, does not reflect Wednesday’s announcement of the easing of Covid restrictions. But Staton said it was unlikely that the mood would brighten when the health emergency receded “because it’s the cost-of-living squeeze that’s worrying us now and this will affect us for months to come”.
On Wednesday, the Office for National Statistics reported that consumer inflation rose at the fastest annual rate in 30 years in December. Economists are forecasting that inflation will peak in April when Ofgem, the energy regulator, will increase its default energy tariff price cap.
The GfK data chime with ONS figures published on Thursday which showed that in the first half of January two in three people in the UK reported their cost of living had increased over the previous month. Nearly nine in 10 of those blamed rising food prices and about eight in 10 attributed the squeeze to rising energy bills.
Linda Ellett, head of consumer markets, leisure and retail at KPMG UK, said their research suggested that about one-third of consumers would reduce their discretionary spending in 2022 because of rising living costs.
“The cost of living squeeze is also causing those who have been able to save during the pandemic to either sit on their savings, use them to offset costs, or to be conservative with how much of it they are willing to spend this year,” she added.