Living standards in the UK continue to be hampered thanks to the effects of inflation, as today’s quarterly economic data from the Office for National Statistics shows. Despite positive growth in real household disposable incomes in Q4 2022, things crashed back to Earth with a fall of 0.8% in Q1. This was in the face of falling energy prices and the cost of living crisis meant to be showing signs of easing. Unfortunately, households are in it for the long run thanks to tge effects of inflation which is refusing to budge from recent historic highs, and rising interest rates failing to bring it down.

With interest rates expected to continue to rise, the pain is only going to get worse for consumers, particularly those with a mortgage whose fixed rate deal may soon be coming to an end. Worryingly, however, the household savings ratio also fell in the last quarter and according to the ONS households experienced simultaneous withdrawals from their deposit accounts and negative secured loans for the first time ever. The safety buffer built up during the pandemic is slowly being chiselled away.

This all comes at a time when the tax burden is showing no sign of abating either. As the data points out the downwards pressure on savings ratios is partially due to rise in taxes on income of £5.4 billion. This pressure on tax is only going to increase as the ‘fiscal drag’ continues to hit and more and more people are drawn into paying higher levels of tax.

What Lies Ahead?

All this points towards a difficult environment for savers and consumers, especially because of the stingy interest rates on cash savings when you take inflation into account. Complex economic conditions require level headedness to prevail and as such savers need to be saving via the long-term by investing as this gives the greatest potential to inflation proof your savings. Getting financial advice is also crucial in a period where finances are under strain and the tax burden is high. This cost of living crisis is far from over and has a while yet to run and thanks to the effects of inflation, consumer finances are going to have to react accordingly.

If you need any help or advice, please don't hesitate to get in touch.

Ian Cook, financial planner at Quilter - 30th June 2023