By Trevor Clawson

Household spending in the UK recovered to levels seen before the great financial crisis last year, according to new figures from the Office for National Statistics(ONS), but with wages continuing to lag inflation and housing costs at unprecedented levels, the report raises fears that many Britons are living beyond their means.

Published in mid-January, the ONS Family Spending Report highlights trends in household spending over a 12 month period running up March 2017, while also drawing on figures collected since 1957 as a comparison.

And on the face of it, families are confident and prepared to spend more. Over the 12 months period, weekly spending averaged £554.20, representing a rise of £21.20 over the previous year, and taking outgoings back to pre-crisis levels.

In particular, the ONS cites a rise in transport costs as the biggest driver of year-on-year change. In a month where regulated rail figures were once again raised above inflation, the report provides a reminder that for working families, in particular, the cost of getting to and from a place of employment is taking a bigger share of household income. In the year to March 17, the ONS estimates that transport costs rose by an average of £5.40 per week to a total of £79.70. However, these figures cover not only the cost of the daily commute but also purchases of new and used cars, which took place in record numbers.

Housing Costs Double Over 60 Years

Perhaps unsurprising housing costs accounted for the largest drain on household income, and over the 60 year period covered in the survey the cost of owning (or renting) and maintaining a home are eating up an ever-larger share of wages.

The UK property market has been relatively subdued in recent years and in pockets of the country – not least London – estate agents have reported the price of homes falling back slightly.  But when housing costs – including rents and council tax – are measured in terms of household spending, outgoings continued to rise between 2016 and 2017. At the start of the year in question, housing cost inflation stood at 0.7%. By March 2017 this had risen to 2.3%.

But it’s when the cost of accommodation is compared across 60 years that the scale of inflation becomes most apparent.  Between 2016 and 17 housing accounted for 18% of household income  – this was almost double the level recorded in 1957.

The headline figures disguise a more complicated reality. For instance, an earlier batch of ONS figures – published in December – found that those who rented accommodation were spending 27% of their income but there was a huge amount of variation from city to city and region to region. For instance,  in London and the South East tenants were paying more than 40% of their wages to Landlords. In contrast, that figure dropped to close to 20% in the North East.

Overall, though – the trend is clear. Over the years we are all spending a lot more – in real terms on housing.

Non – Essential Spending On The Rise

Household Spending Recovers But Housing Costs Double

Consumers spending is one of the main motors of growth in the UK economy and in that respect, there is good news in that the report does not suggest that consumers are being crippled by essential spending and – in particular – the rising cost of housing. In fact over the year in question, disposable income rose by more than 2.0%.

But if you happen to own or work for a company that is chasing the consumer pound it was a  mixed year. Spending on food and clothes fell, while there was a much greater tendency to spend on recreation, such as nights out in restaurants and entertainment.

Overall,  those on lower incomes increased spending more (in percentage terms) than their wealthier counterparts. When calculated in terms of pounds and pence, however,  households at the top end of the income scale spent around £1,200 per week while spending by those on the bottom rung came at an average of just £200, revealing a sharp wealth divide.

There was significant age disparity too. With housing costs accounting for such a large slice (on average) of income, those in their middle years were paying out the greatest sums. In contrast, the elderly, who often are paying out very little on housing, were the biggest spenders on recreation.

Savings Rates at Ten Year Low

One message that comes through loud and clear from the report is that the savings ratio fell to 7% – its lowest level since 2006 – suggesting that households had made a decision to spend rather than put money aside for a rainy day, hence the increase in household spending – perhaps not surprising at a time when returns from interest rates sat at an all-time low.

Household Spending Recovers But Housing Costs Double

Trouble Ahead

And the ONS itself makes clear, these are historic figures. Any real-term assessment of spending depends on factoring in wages and inflation and the period covered by the survey coincides with a time when the consumer prices index was being pushed higher by a falling pound but had yet to hit levels above 3.0% seen in recent months.

And according to Jonathan Watson, an analyst at Foreign Currency Direct, rising inflation is now affecting spending patterns:

“Consumer behaviour is largely mirroring that of what might be expected in a recession where consumers tighten their belts and spend more on necessities,” he says.

“Consumers have been forced to tighten spending in recent months as the effects of higher inflation see consumers with less disposable income. Inflation is the rate at which the prices of goods increases and it has been steadily increasing since the Brexit vote. Unfortunately, wages have not been keeping pace and uncertainty over the economic outlook is stalling consumer spending.” 

And according to the Resolution Foundation – a think tank dedicated to improving the lives of those on middle and low incomes  –  has warned that the next set of data could show family incomes are being significantly squeezed. Commenting in a blog on the data, Foundation Research and Policy analyst Stephen Clarke said:

“Between March and December, the ONS measure of inflation had risen by 4.0 percentage points, spurred in by strong increases in food, clothing and recreation. Those households that dedicate a higher proportion of their spending to those items will fell price rises much more keenly.”

So any trends highlighted by the survey must be seen against a backdrop of wage rises falling further and further behind inflation in recent months – something that is almost certain to put pressure on disposable incomes and feed through to growth in the wider economy.