It is expected that the Consumer Prices Index (CPI) measure of inflation will ease closer to the 2% target, when the data is published next week.
This will continue the trend seen over the last year of falling inflation levels, which reached 3.2% in the year to March.
If inflation falls to 2%, this will mark the end of a three-year inflation spike that has seen households spending less and saving more, research from the Resolution Foundation revealed.
Since March 2021, prices have risen by 22%, and the October 2022 peak of 11.1% was the biggest among the G7 economies and third-highest among OECD countries.
The price of essential items rose by higher levels and energy bills were up 90%, while food prices rose 31% during this time.
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The think tank’s research showed that poorer families were hit hardest during this time, as they spend 50% more on food and energy bills than richer households.
Households cut down on spending
On average, instead of spending more, households have spent less and overall consumption levels have fallen.
Real household disposable incomes have fallen by 1.1% per person since the end of 2019, which is equivalent to £280 per year.
However, consumption per person is down 4.7%, which means that, per person, we’re spending £1,200 less per year since before the pandemic.
Energy use is down by 11% since the start of 2022 and food consumption fell by 7%. Spending on luxury items such as fridges and crockery also fell by 18%.
Separate data from the British Retail Consortium (BRC) recently showed the rate for food inflation falling to 3.4% in April, down from 3.7% in March. This was the twelfth consecutive deceleration, with inflation in this category at its lowest since March 2022.
Savings levels have also risen, and in the last three months of 2023, families saved 6% of their disposable income on average. This is the highest level seen in over 30 years, according to the foundation.
Since inflation started falling and energy and food prices have gone down, any extra money households have saved has gone towards going out or going abroad, not on buying goods.
Net debt in the UK, however, has risen over this time. In previous periods of high inflation, net debt has fallen, but over the last few years it has risen by 6%. This is partly because of household support measures, which cost £50bn between 2022 and 2023.
Inflation shock has ‘changed what people do with their money’
James Smith, research director at the Resolution Foundation, said: “Next week, headline inflation should finally return to normal levels, marking the end of the UK’s biggest inflation surge in more than four decades. The sheer scale of this near 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 rise in the cost of essentials hitting lower-income families hardest. It has also turned us from a nation of spenders to a nation of savers, with credit card spending falling by 13%, and families saving around £54bn a year more than we might have expected.”
Smith added: “While this high inflation phase may be largely behind us, its legacy will be felt well into the future, with national debt having increased, rather than being inflated away as we have seen in the past.”
