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Inflation is ‘turning Britain into a nation of savers’, reports the Resolution Foundation

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Inflation has significantly reshaped the UK economy, steering households towards the highest savings rate in three decades and reducing spending by £50 billion, according to the Resolution Foundation.

According to the Resolution Foundation, inflation has significantly reshaped the UK economy, pushing households towards the highest savings rate in 30 years and reducing spending by £50 billion.

In a recent report, the economic think tank highlighted that household consumption had shrunk more than the decline in real incomes during the cost of living crisis, with excess money being poured into savings accounts. Compared to the last three months of 2019, the last quarter before the Covid-19 pandemic, real household disposable incomes fell by 1.1%, or £280 per year. However, real spending has fallen by 4.7% or £1,200 per year.

The almost £1,000 difference between lower incomes and spending has gone into savings, with families saving 6% of their income in the final quarter of last year. This represents the highest non-pandemic savings rate in thirty years. The foundation noted: “If they had instead made savings at 2019 levels, this would have increased total spending by £54 billion per year.”

James Smith, research director at the Resolution Foundation, commented on the findings: “The sheer scale of this almost three-year inflation shock has reshaped the economy and public finances and changed what people do with their money. The crisis has made us poorer, with the sharp increase in the cost of necessities hitting lower-income families the hardest. It has also changed us from a nation of spenders to a nation of savers, with credit card spending falling by 13% and families saving around £54 billion a year more than we expected.”

Inflation hit a 42-year peak of 11.1% in October 2022, but has since fallen to 3.2%. At the same time, the Bank of England raised interest rates to 5.25%, the highest level in sixteen years, making saving more attractive than spending.

The report also pointed out that increased government spending to offset the cost of living crisis and the prevalence of inflation-related government debt pushed the UK debt-to-GDP ratio up by six percentage points during the price rise. Historically, periods of intense inflation have typically led to a decline in the country’s relative debt burden.

The Resolution Foundation’s findings suggest that while inflation has created financial pressure, it has also led to a significant shift in household financial behaviour, leading to increased savings and reduced consumption across the UK.