Feeling the pinch

Q1 2022 UK Deloitte Consumer Tracker

The first quarter of the year has seen consumer confidence take its biggest dip since 2020, undoing recovery we had been witnessing since the start of 2021. Inflation increased at a faster rate than earnings, interest rates also rose and combined with the impact of the pandemic and the Russian invasion of Ukraine, led to a significant deterioration of consumer confidence. The Deloitte Consumer Confidence Index  declined by five percentage points to -17% compared to Q4 2021 representing our Tracker’s largest fall since Q1 2020 when the UK entered its first lockdown at the start of the pandemic.

Consumers under pressure

Of the six measures that make the Deloitte Consumer Confidence Index, sentiment on levels of disposable income is the starkest, with a quarter-on-quarter decline of 23 percentage points, reaching an 11 year low of -49%. Consumers are clearly feeling the pinch of rising living costs. With, inflation at its highest level in over 40 years, and rising energy price caps and increased national insurance both coming into effect since April, consumer sentiment on their disposable income is likely to decline further in the months ahead. According to our data, one in two consumers indicated their overall personal expenditure has gone up in Q1 2022 compared to one in three back in November. The majority blame prices going up.

Trading down and cutting back

With the pressures on their budgets, many consumers are forced to rethink how they spend. Our data shows that of those spending less, one in two consumers (54%) are buying fewer goods or services in a conscious effort to save money. The data also shows that a third of consumers who are spending less (35%) said they are choosing cheaper brands or stores and a quarter (25%) are taking advantage of sales or discounts. Our Q1 2022 Tracker also points to people cutting back on major good purchases, for example postponing buying large household appliances such as washing machines or furniture and items for the home.

A tale of two sides

Our Tracker also reveals   Essential spending has increased significantly in the first quarter of the year, but so has discretionary spending; unveiling a gap in consumer spending patterns. Higher spending on transport and everyday household items have seen the biggest quarter-on-quarter leap among essential categories. This increase is mainly due to price inflation and is affecting the lowest income households the most.

By contrast, within the non-essential categories, the highest income households were more likely to have been spending on holidays, going out, and eating in restaurants. For these higher earners, spending on socialising and travelling – following the end of all COVID-19 restrictions in Q1 – is more likely thanks to continued strength in the job market, record house price growth, access to borrowing and savings accumulated over lockdowns when spending opportunities were limited.

Uncertainty prevails

Overall, although wages are unlikely to keep pace with inflation and economic sentiment has fallen this quarter, our data shows that consumer spending will continue to increase in Q2 2022. In part this will be driven by higher-income households, who account for a disproportionate share of spending, and will continue to drive discretionary spending in areas such as the hospitality and travel sectors, despite continuing geopolitical concerns.

However, at the start of 2022 we were expecting to see some level of normalisation in shopping patterns, but with surging inflation on the back of everything else that had happened in the last two years uncertainty remains high. Trends such as eating out more, a return to the office and increased travel could be tempered by households trying to save money by working from home, eating in and cutting their holiday budgets.

It will be important for consumer businesses to discern what consumer behaviours are being driven by the lifting of restrictions, and what behaviours are starting to emerge as cost and energy price increases begin to bite. Also, the extent to which people will continue to work from home is one of the biggest unknowns — and one of the most influential factors on how people shop.

Moreover, to counter the rise in their costs, businesses should look for savings through reducing operating costs and scaling automation across their organisations. Although, some level of price increases is inevitable, to facilitate trade-offs within a company own brands businesses will need to cater for all consumers whether it is serving the more affluent with continued premium offerings or helping those on lower incomes by delivering more value ranges and competitive prices.

NOTE: The Deloitte Consumer Tracker is based on responses from 3,091 UK consumers between 18^th and 21^st March 2022, as all remaining COVID-19 restrictions were removed.

If you are interested in reading more about consumer sentiment visit our Deloitte Consumer Tracker webpage, or visit our Global State of Consumer Tracker dashboard where you can interact with our consumer sentiment data across 23 countries.