Consumers are starting to run down the savings built up during the pandemic in order to sustain spending patterns threatened by higher inflation, Bank of England figures suggest.
With the cost of living rising, Threadneedle Street data showed a marked drop in December in the amounts being deposited in savings accounts and national savings.
The Bank said savings stood at £3.2bn in December, less than a third of the £10.6bn monthly average for the previous 12 months. Consumer credit increased by £800m – of which £400m was on credit cards.
Analysts said more people were liable to dip into their savings over the coming months – a period likely to be marked by an increase in the annual inflation rate from December’s 5.4%, higher taxes and higher energy bills.
Thomas Pugh, an economist at the consultancy firm RSM UK, said: ‘The latest money and credit figures suggest that consumers are borrowing more and saving less as they try to maintain their lifestyles in the face of surging inflation.
“A rise in consumer borrowing over the next year may suggest that consumers are dealing with high inflation and attempting to maintain their lifestyles by borrowing. Indeed, we know that retail sales volumes slumped in December, so it seems unlikely that the £0.8bn increase in consumer credit in December was due to consumers buying more goods.”
Samuel Tombs, a UK economist at Pantheon Macro, said it was unlikely households were dipping into savings voluntarily given consumer confidence dropped to an 11-month low in January. Excess savings accumulated while spending opportunities were restricted over the past two years would now be run down to compensate for a likely drop in real (inflation-adjusted) incomes of 1.5% this year.
Despite the squeeze on living standards, separate Bank of England figures showed demand for mortgages continued to be strong. There were 71,000 approvals for new home loans in December compared with an average of 66,700 a month in the year ending in February 2020, the period before the start of the pandemic.
Meanwhile, the monthly snapshot of manufacturing from IHS Markit and the Chartered Institute of Procurement and Supply found output and employment rose at their fastest pace in six months as firms responded to stronger order books and started to get on top of supply bottlenecks.
Rob Dobson, a director at IHS Markit, said: “UK manufacturing made a solid start to 2022, showing encouraging resilience on the face of the Omicron wave, with growth of output accelerating as companies reported fewer supply delays. Causes for concern remain, however, as new orders growth slowed, exports barely rose, staff absenteeism remained high and manufacturers’ ongoing caution regarding supply chain disruptions led to the beefing up of safety stocks.”