Cost of living crisis: Low-income households set to lose £850 of spare cash

People shop in a supermarket in Huyton, Britain as cost of living squeeze continues
Cost of living crisis: More than £12bn worth of spending on non-essentials across the whole economy is set to be wiped out in total, Retail Economics found. Photo: Jon Super/Xinhua via Getty Images

The UK is on course for a “severe” cost of living crisis which is set to leave families with significantly less cash for spending, a new report has found.

According to data from Retail Economics and HyperJar, the least affluent households will see their discretionary income fall by 19.5% per household, or almost £850 ($1,116), as food, clothing, fuel and energy prices continue to soar, and wages lag behind inflation

For the average family, the cash left after paying for essential goods will tumble by almost 6.5% or £430.

Meanwhile, more than £12bn worth of spending on non-essentials across the whole economy is set to be wiped out in total, Retail Economics found.

"With many households already living beyond their means, the inflationary shock will push them into the red making it increasingly difficult to cover essentials and repay debt," the report said.

Read more: European markets mixed as Germany triggers emergency gas plan

The research showed that 13% of British households are barely managing to cover minimum payments on credit card bills, with a further 6% already sometimes unable to do so.

It added that two thirds of UK adults are worried about money (64%), rising to 70% for under 45s. Even among the highest income households, 30% do not always pay off credit card or ‘Buy Now, Pay Later’ (BNPL) debt each month.

Almost a quarter (23%) do not feel on top of their money and spending, and more than half (56%) agree that money is a worry for them.

It comes as UK inflation hit a fresh 30-year high of 6.2% in February, while grocery price inflation reached 5.2% in March, the highest level since April 2012, according to Kantar.

“Rising inflation will see spending power under huge pressure, particularly for the least affluent households who spend a disproportionate amount of their income on non-discretionary items such as food, energy, and fuel,” Richard Lim, chief executive of Retail Economics, said.

“We’re likely to see recessionary behaviours kick in for many households who will cut back on the nice-to-haves and prioritise low costs to make their budgets stretch that little bit further.”

Watch: how to save money on a low income

"Rising inflation and corporate energy bills mean many business leaders struggle to balance employees' financial wellbeing with business fiscal concerns," Steve Tonks, senior vice president EMEA at WorkForce Software, said.

"But, that doesn’t mean organisations are powerless. Earned Wage Access (EWA) is a simple yet highly effective way to improve the employee experience, while helping workers to better manage their finances both in the short and long term.

"Employers have a responsibility to help break outdated pay cycles, now more than ever. But, EWA shouldn’t just be a ‘nice-to-have’ during times of economic upheaval. Instead, it should be viewed as a long-term CSR goal for organisations, supported by ongoing education and advice on money management."

Elsewhere, shop prices rose by 2.1% in March, the fastest annual increase since September 2011, up from February's 1.8% increase.

The British Retail Consortium revealed on Wednesday that prices had risen for five straight months, exacerbated by the geopolitical conflict between Russia and Ukraine.

Food inflation jumped to 3.3% – its highest rate since March 2013 – while non-food inflation reached 1.5% in March, up from 1.3% in February and its top rate since February 2011.

Read more: Cost of living: Brits taking on debt at fastest pace in five years

BRC chief executive Helen Dickinson said: “Our Shop Price Index has been rising more modestly than other inflation measures as retailers were able to limit price rises on many essential goods.

“By keeping the prices of key items down and expanding value ranges, retailers are trying to support customers most affected by the cost-of-living squeeze, many of whom will face higher energy prices and national insurance contributions from 1 April.

“With overall inflation likely to rise even higher according to the Bank of England, consumers will not have an easy ride this year. The war in Ukraine, and volatility in commodity markets is likely to further dampen consumer confidence in the coming months.”

Watch: How does inflation affect interest rates?