Cost of living crisis widens gap between haves and have-nots

interactive investor comments on ONS Covid Impact on Household Spending report.

The Office for National Statistics has today released data exploring the effects of the pandemic on household consumption between January 2020 to December 2021.

Key points:

• The impact of the coronavirus pandemic on household spending has been more striking than that of the 2008 to 2009 global financial crisis.
• During the first two quarters of the pandemic, household spending fell 22.2% because of the introduction of lockdowns and other public health restrictions. 
• Household spending recovered 19.6% in the following quarter and had almost returned to pre-coronavirus pandemic levels two years after the start of the pandemic.

Commenting, Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “The pandemic led to an unprecedented shift in household spending – even more striking than that of the credit crunch – and upended long-standing consumer habits.

“Spending on non-essential services such as eating out at restaurants, beauty, travel and entertainment fell significantly during the first lockdown because strict Covid restrictions hindered us from doing so. But we spent more on other things such as takeaways, streaming subscriptions and loungewear.

“Unlike the credit crunch, government interventions such as the furlough scheme and the £20 per week increase in Universal Credit have protected jobs and incomes and helped drive the recovery in household spending to pre-Covid levels two years after the event.

“But the gap between the 'haves' and 'have-nots' has widened because of the pandemic. The dramatic fall in income during the pandemic due to job loss or reduction in work hours has had a devastating effect on many. Other were more fortunate, becoming accidental savers as a result of a dramatic dip in their expenditure and little change in household income.

“This inequality is set to widen amid the escalating cost of living crisis. Ballooning inflation underpinned by increases in the cost of energy, food and fuel has resulted in the biggest decline in living standards since the 1950s. Many will be forced to raid their lockdown savings to maintain financial buoyancy, while the cost-of-living squeeze could push those who lived on a bare-bones budget during the pandemic to financial breaking point.

“Things are likely going to get worse before they get better, so it is important to take steps today to bolster financial resilience now to give you some peace of mind in the coming months. This may translate to doing an emergency budget, cutting down on non-essential spending and squirrelling away more money into a rainy-day fund if you can afford to do so.

“And do seek help and support – talking about money issues is the first step towards a solution. Those worried about being unable to meet payment obligations should contact their providers for support.”