UK households lose £5,455 to inflation in two years

Calculations by interactive investor show how price rises across key areas of household expenditure robbed Britons of purchasing power.

The UK lost £153 billion to inflation over a two-year period to March 2023, averaging £5,455 per household, as price rises across key areas of household expenditure robbed Britons of purchasing power, new calculations by interactive investor find.

The UK’s second-largest investment platform for private investors, calculated these figures by applying inflation to the latest ONS household spending data, to March 2021. interactive investor then projected household spending over the past two years using Consumer Price Index (including owner occupiers housing costs) over a two-year period to calculate how much household spending has risen with inflation to the end of March 2023. 

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Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “This once in a generation type cost-of-living crisis has robbed us all of purchasing power to the tune of £153 billion over the past two years, placing a huge amount of strain on household budgets. There has been no escape from rampant inflation because most of it is reflected directly in our energy and grocery bills, which we are resigned to paying as they form part of essential expenditure for many.”

Energy squeeze

Within the overall £153 billion that has been taken by inflation over the past two years, Britons spent an extra £53 billion on household energy, amounting to £1,885 per household on average, over the past two years. The soaring cost of food has also been another pain point for households, which have had to fork out an additional £32 billion collectively, or £1,147 per household on average, owing to inflation over the past two years. 

For food and energy inflation, interactive investor used CPI figures for food and energy prices over the period and applied them to the spending for the average household in March 2021.

Assumptions and sources: ONS household spending data to March 2021, updated using Consumer Price Index (including owner occupiers housing costs) to March 2023, and for energy and food breakdowns, ii used CPI to March 2023.

Alice Guy, Head of Pensions and Savings, interactive investor says: “Inflation is a cruel taskmaster and has robbed many families of the ability to save for and build a brighter future for their families. Families have needed to find an extra £5,455 in total over the past two years just to keep their heads above water. Many people have been forced to raid their life savings or relying on credit to tide them over.

“There is glimmer of hope on the horizon is that there are signs inflation may be beginning to ease. It’s encouraging that supermarkets are beginning to talk about cutting prices on some product lines. Wholesale energy prices are also beginning to fall, and we should see some of that saving passed on in the months to come.

“If you are struggling to make ends meet then don’t be afraid to reach out and ask for help. Banks and lenders have a duty to help their support their customers and debt charities can help review your budget and may be able to help you cut your debt costs by speaking to your lenders.

Myron Jobson says: “Despite a strong jobs market, earnings haven’t been able to keep up with inflation. The cost of debt has been climbing while the value of cash savings has been dwindling at an alarming rate once you take inflation into account. We are all feeling the screws tighten on our spending, but for those living off a bare-bones budget, the stakes are much higher because they don’t have the financial cushion.

“Prices are no longer rising at the fastest pace in 40 years and inflation is expected to cool further this year – but that doesn’t mean that the cost-of-living burden on personal finances will lift anytime soon. When every pound counts, it is important to keep tabs on your spending habits to get a better idea of the goods and services that are eating most into your budget, and where you could cut back as inflation remains stubbornly high and the cost of borrowing rises.”

Myron’s six tips to ease the cost-of-living budget squeeze

Maintain a budget

“Budgeting is integral when it comes to keeping your financial house in order. It allows you to plan how much you will spend or save each month as well as track spending habits.

“It’s worth keeping a spreadsheet of your own spending habits. There is a plethora of budgeting templates available for free online as well as apps to help you on your way.

“The rising cost of living means we are saving less to maintain current levels of spending, so be prepared to make tweaks to your budget as inflation continues to rise.

“Once you have a better idea on how you spend your money, you can explore ways to help you live within your means.”

Build and maintain a rainy fund

“It remains good practice to keep a rainy-day fund to tide you over when times are tough financially - three months’ salary is a good role of thumb and perhaps even better in these tough times, six. But if you can afford it, investing can help grow your wealth and hit major financial milestones over the long term. Even modest contributions can make all the difference in the long run.” 

Save on food bills

“Shop around for the best deals – especially for high-ticket items. Even simple things such as opting to purchase a store brand equivalent of traditional larder products can help to cut down the cost of groceries.

“Consider buying items in bulk so you are not constantly spending as prices continue to climb. It is also worth taking advantage of supermarket loyalty schemes - such as Tesco Clubcard and Nectar card – which can give you access to unlock big discounts and other exclusive rewards.”

Shop around for the best deals

“You won’t know whether you are paying over the odds for things unless you shop around for the best deals. For example, if you've been with a broadband provider for a while, it is likely that any introductory offers will have expired, and you might be paying more than you need to. The same goes for mobile phone contracts. Shop around to see if you can get a better deal."

Remember - financial support is available

“Those who a struggling financial needn’t suffer in silence. Don’t be afraid to ask for support.

The various cost-of-living support schemes and measures to ease the inflationary crunch on budgets, including the cost-of-living payments, spread across 2023/24, are worth up to £900 and the Household Support fund distributed by local authorities. It is worth consulting a debt advice charity such as StepChange or Turn2Us and they will go through all your options.”

Investing can be worthwhile – if you can afford to do so

“Investing your money can prove worthwhile if you can afford to keep your cash wrapped up in investments for at least five years (ideally). You don’t need huge amounts to start (as little as £25 a month). While past performance is not an indicator of future results, the long-term potential of the stock market is an effective tool for building financial resilience.”