Older woman sitting in kitchen looking at paperwork
Jul 2022 | Marketing Solutions | Marketing, Marketing Data
By Posted by Debbie Oates

The cost of living crisis is constantly evolving

Putting my consumer hat on, the cost of living feels like an ever-ascending spiral with daily price rises across both energy, fuel, and food prices, with the prediction of more to come, most notably the new energy cap due in October this year.

The sheer scale of price increases is demonstrated by the Experian fuel price information, which shows how price per litre has increased since 2016 – which was the lowest fuel prices in the last decade. When Tim Peake was making his historic space walk then a litre of unleaded was just over a £1!

Infographic showing the average pump price per litre since 2016

Whilst these increases will impact every single household, the reality is that those with the lowest levels of affluence will be hit hardest given the percentage income spent on essential item spend will increase dramatically. So despite valiant attempts by many, some will simply struggle to cope, being able to identify and help those in greatest need is obviously front of mind for Local Authorities, Charities and Financial Services organisations.

For those in the squeezed middle there will be different, but still material and unfamiliar decisions to make. These will be dependent in part on personal motivations and consumer confidence – do they put off going on holiday, doing house renovations, eating out, or switch to cheaper brands or supermarkets to help balance their budgets? Again, these types of shifts in behaviours will have knock on impacts on those businesses servicing consumers. Organisations will need to be able to both forecast and react to likely shifts in consumer spend but also need to understand whether the consumers who are spending are those who are brand loyal or are they appealing to a whole new segment of the population.

Understanding different forecasted outcomes

One of the hardest things to distil and crystalise through market noise is how particular areas and households are already being impacted given the swift increase cost of living. Determining what the position might be as prices continue to rise generally in addition to the looming cost in energy price caps adds even more complexity. However, understanding this future picture is perhaps even more essential than grasping todays, giving us time to plan and develop strategies in advance.

By utilising ONS data combined with Experian’s own economics and demographic modelling, we can predict household incomes, alongside essential spend required, on items such as lighting, heating and food. This then defines what is left as disposable weekly income in varying bands from <£0 to over £2000. Layering in the ability to scenario plan based on how key essential costs may fluctuate in future allows us to understand how this is likely to impact discretionary spend levels. For example, what happens when fuel rises by 40% or how would a 20% increase in food costs play out?

In order to answer some of these questions below are just a few key observations, based on using May 22 as the baseline, with a nominal threshold of having £500 or less left to spend each month after essential spend – 28% of household currently fall below this threshold.

If energy prices were to rise by 40% in October then we forecast that this would see an additional 4% of households fall into the below £500 per month discretionary income bracket, with an estimate of nearly another 4% of households falling into the negative discretionary income trap.

A graph of discretionary income in the UK

Fig 1: Forecast % area – 40% Energy price increase

However, it is highly likely other prices will rise, and with food a large proportion of our essential spend we need to face reality and assume that rises also. Predictions range across the food market with some staples like pasta rising 50% in the last year, however in this scenario we have assumed food rises by 20% at the same time as the energy increase. In this instance we predict another 3% of households will move into the negative discretionary income trap taking the percentage of households falling into our below £500 per month discretionary spend bracket to 35% in total. Mapping these changes at a local level shows some real hot spots around the UK where the need will be greater. For example, as highlighted on the map below the South West as well as certain London regions and the East Coast.

A graph of discretionary income in the UK

Fig 2: Forecast % area – 40% Energy price increase and 20% Food Price Increase

Considering the regional implications of rising costs

When discussing these regional factors, it is important for many business or Local Authorities to be able, to not only assess the scale of the problem but to be able to drill down to their respective catchments or regions. Taking North Devon as an example we can see that whereas currently only 1% of the Households were in the negative discretionary income band, however based on our forecasted cost scenarios then this jumps to 16% of households that could fall into the negative discretionary income band highlighting the fact that certain local areas are more at risk than others.

A graph of discretionary income in the UK

Fig 3: Forecast % area – 40% Energy price increase and 20% Food Price Increase – spotlight on North Devon

This type of insight can be cut many different ways to help better support communities and businesses. For example, we know not all Mosaic groups will be impacted the same. Our Family Basics group, are predicted to lose nearly 21% of their discretionary income whereas the City Prosperity circa 5%. Keeping a close eye on the market trends and how your customer segments are evolving using Mosaic will help organisations plan and adapt their strategies to get closer to customer needs through this time of flux.

Our forecasts also all give a view of likely impact on non-essential spending will occur across sectors. Potentially not surprisingly we expect the biggest impact to be within recreation and culture. Coming on the heels of Covid-19 restrictions then this is obviously going to be another challenging time for the sector.

The above story is not a pleasant one, however given what we hear within the media on a daily basis we suspect that it is unfortunately not a surprise. The cost of living crisis is constantly evolving with updated price rise expectations or potential to target additional support such as the government energy support schemes. However, having the ability to build out scenarios to help underpin strategies that can safeguard the most vulnerable or react to consumer behavioural shifts to minimise impact on businesses which support our economy will help us better navigate through.

If you’d like to find out more about the insight on which this article was based then please contact us.