Britain’s cost-of-living squeeze will leave an enduring mark

THE WORST of Britain’s most sustained period of high inflation since the 1970s is coming to an end. The headline rate of consumer-price inflation in November fell to an annual pace of 3.9%, its lowest reading in more than two years. That is welcome news for everyone, not least Rishi Sunak, the prime minister, who is set to fulfil his pledge to halve the pace of price rises this year. But the cost-of-living squeeze is not over yet, and some of its effects are likely to endure.

Inflation has been above the Bank of England’s target of 2% every month since August 2021; the bank’s monetary policy committee, which sets interest rates, does not expect to hit that target until the end of 2025 (although the lower-than-expected November figure may presage a faster fall). Wages have been growing quickly in cash terms, helping to cushion the blow to incomes, but the hit to households has still been severe. Although real weekly earnings have been broadly flat since the spring, they are still 3.6% below their level in December 2021.

What’s more, real wages do not capture the full picture. Real household disposable income per person, which captures the impact of changes in taxation and the welfare system, is a better measure of living standards. The Office for Budget Responsibility, the government’s fiscal watchdog, estimates that this will still be 3.5% below its pre-pandemic level by the end of the financial year 2024-25, the longest drop in living standards since comparable records began in the 1950s.

Such a prolonged squeeze is likely to reshape consumer behaviour. The most persistent shifts will probably be in food. Along with energy, food was a major cause of the spike in goods prices in 2021 and 2022 (see chart). Unlike energy bills, food prices are still rising at a fast clip. They were up by 9.2% in the year to November.

Analysts regard 2-4% food-price growth as the sweet spot for supermarkets; anything more than that and consumers tend to trade down to less pricey goods and a worsening product mix begins to crimp profits. That is exactly what has happened, according to Kantar, a firm which tracks supermarket performance. Own-label sales have surpassed their branded equivalents in every month since February 2022. Retail bosses fear that it will take a long time for that to reverse: one says that it tends to take consumers two or three months to establish a new habit but often much longer for it to unwind.

Where Britons shop has shifted, too. The market share of Aldi and Lidl, two German discounters, has continued to expand. So has the social demography of those going through their doors. According to Kantar, “some of the traditional shopping demographics and stereotypes have been thrown out of the window.” Shoppers at discount stores once skewed towards lower-income households but no longer. In October 54% of shoppers at Aldi and Lidl were from the higher earning “ABC1” social category, pretty much bang in line with their 55% share of the overall population.

Partly because of increased sales of budget items and rising competition from the discounters, overall supermarket operating-profit margins contracted to 1.8% in 2022-23, down from 3.2% the year before, according to an investigation by the Competition and Markets Authority, a government watchdog. Analysts fret that rebuilding margins will be a slow process lasting several years.

Times have been tough for the hospitality industry, too. Barclays, a bank, reports rising spending on “insperiences”, with takeaways and digital-media subscriptions outperforming other types of entertainment. Pub-chain managers reckon that people are in general going out less but that, when they do, they are spending a bit more on average. This pattern has helped prop up food-led businesses like chain restaurants at the expense of local pubs. The number of premises licensed to sell alcohol in Britain fell below 100,000 for the first time in two decades in the third quarter of this year.

Drinking is not the only vice to have been affected by cost-of-living pressures. Vaping is set to become more common than smoking in Britain by the mid-2020s, and price differences are helping to propel that switch. An average packet of 20 cigarettes now costs £14.57 ($18.56), compared with around £5 for roughly the same number of puffs from a disposable vape (and even less for a refillable device).

The new year should be a better one for consumers. Household incomes should stop falling; a cut in national-insurance contributions, a payroll tax, due to take effect in January is worth around £450 a year to someone on the average full-time salary. But the habits picked up over two years of high inflation, not to mention those acquired in the lockdowns of 2020 and 2021, will take time to shake. The average Briton is likely to be eating budget cans of baked beans and going to the pub less for some time to come. “We had the pandemic in 2020, the reopening in 2021 and then two years of no one having any money,” says one pub-chain director. “We’d just like a normal year.” What counts as normal may have changed. ■