Photographer: Simon Dawson/Bloomberg

Save Less, Buy Less: Britons' Response to Real-Income Squeeze

A BOE survey asked households what they would do if prices jumped 5 percent

U.K. households, already saving the least on record, say they might cut back even more.

A blog post by Bank of England staff published Wednesday said that if prices rose markedly, around one-third of consumers say they would choose to buy the same as they do now, even though it would be more expensive. A similar proportion would increase spending in some areas but not in others.

To finance the extra outlay, most would either save less each month or dip into their existing nest eggs. With the saving ratio dropping to just 1.7 percent in the first quarter, economists have voiced concerns that households are leaving themselves increasingly exposed to potential shocks.

The BOE economists Philip Bunn and Jeremy Rowe drew their findings from the twice-yearly NMG survey of 600 households carried out online during the second half of April and early May. Respondents were asked how they’d respond if the cost of everything increased by 5 percent from tomorrow for a sustained period, assuming their income would not be any higher unless they took action to increase it.

While the blog noted that a jump in prices of that magnitude is not expected, the results indicate a decline in real spending of 2.75 percent. If the response was linear, each 1 percent of real income shock would lower real spending by 0.55 percent, in line with previous survey data based on how households responded to actual events, the economists said.

Those with the lowest savings would be more likely to decrease spending, the blog reported. For those who don’t plan to cut back, 60 percent said they would reduce the amount they save or use money set aside, while almost one-fifth of households said they would work more hours.

There was one silver lining for the BOE’s Financial Policy Committee, which has previously highlighted consumer debt as one of the key risks to financial stability. Just 4 percent of respondents said that they would borrow from banks. 

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