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.

In a recent report, the economic think tank highlighted that household consumption had contracted more than the fall in real incomes during the cost of living crisis, with excess cash being deposited into savings accounts. Compared to the final three months of 2019, the last quarter before the Covid-19 pandemic, real household disposable incomes have decreased by 1.1%, or £280 per year. However, real spending has declined by 4.7%, or £1,200 annually.

The nearly £1,000 difference between reduced incomes and spending has been directed into savings, with families saving 6% of their incomes in the final quarter of last year. This represents the highest savings rate outside the pandemic in 30 years. The foundation noted, “Had they instead saved at 2019 levels, this would have boosted aggregate spending by £54 billion a year.”

James Smith, Research Director at the Resolution Foundation, commented on the findings: “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 also has turned 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 might have expected.”

Inflation peaked at a 42-year high of 11.1% in October 2022 but has since fallen to 3.2%. Concurrently, the Bank of England raised interest rates to 5.25%, the highest in 16 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-linked government debt pushed the UK’s debt-to-GDP ratio up by six percentage points during the price surge. Historically, periods of intense inflation have typically seen the nation’s relative debt stock fall.

The Resolution Foundation’s findings suggest that while inflation has imposed financial strains, it has also prompted a significant shift in household financial behavior, leading to increased savings and reduced consumption across the UK.