The recovery seems to have well and truly set in. Today’s ONS release of UK growth data suggests that the UK economy grew by 0.7% in the fourth quarter of 2013. And growth also looks to continue next year.
If wages keep pace with prices in the future, immediate pressures on household budgets will be eased. However, more concerning is the composition of price rises and the impact on household expenditure.
As a result of rising prices, consumer budgets are more and more being taken up by essential expenditures and this is denting household spending power. Just looking at the last ten years, analysis using the Which? Spending Power Index shows that if food, housing and energy prices had risen at the same rate as general inflation, disposable incomes would be 5.2% higher in real terms than they are today; that’s the equivalent of £1,320 at today’s prices.
Dents in household spending
Consumers are also being asked to contribute to investment in essential markets such as telecoms, energy and water. The recent National Infrastructure Plan outlined investments currently pencilled into the infrastructure pipeline. A conservative calculation shows that this could amount to increased costs of £740 per household per year up to 2020. And the demise of defined benefit schemes and increased life expectancy mean that we are all going to have to sacrifice more of our pay today to secure our future living standards.
Similar arguments can be made with increasing needs to fund pensions, social care, children’s (higher) education and childcare. All in all, increased needs to provide for the future and for new essentials means that there is less to be spent on what we need and what we want now.
Of course, larger rises in real terms pay will ease some of these issues. But with shifting consumption needs, heavier requirements to save for the future and an increasing burden of non-discretionary spending, it is unlikely that pay rises will be enough.
The big cost of living sum
So what else can be done? First it needs to be accepted that there is not a clear enough articulation of the combined impact of these price rises and future demands on household budgets. Getting a handle on this “Big Sum” will empower consumers to take the necessary steps and politicians to put in place the right policy responses to raise livings standards.
In the short-term consumers can attempt to shift their consumption patterns as we have recently seen for energy. They can also be helped to more actively pursue the best value options. A clear example is in annuity markets where, despite rates varying by up to 38%, only 30% of people switch provider when they come to retire.
What’s needed to set living standards on an upwards and sustainable trajectory is a more fundamental shift in how consumers spend their money and engage in a huge range of essential and non-essential markets. Policy makers and regulators also need to make sure that markets work better for consumers and that public services respond to consumer needs.
This is an excerpt from Matthew Oakley’s blog on Huffington Post.