We have heard about people having to choose between heating and eating due to rising energy costs. However, the news from Ofgem that the energy price cap will rise by 80% in October is likely to lead to many cutting back on both.
Consumers set to rein in spending further
In the latest consumer research conducted for IGD (19-21 August 2022), 39 million people (75%) have reined in their spending in the last 2-3 months due to the cost of living crisis. Lowest income consumers have cut back more than those on higher incomes (80% vs 73%). This follows news last week that real wage levels are falling at record levels (see here).
The chart below makes for sobering reading. 35 million (67%) will have to cut back spending further to absorb the increase in the energy price cap. Only 16% will not need to cut back their spending to absorb the rise in the energy price cap.
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Hardship ahead for many
However, 6 million (11%) consumers are facing severe economic hardship as they are unable to cut back their spending further.
Lowest income consumers will need the most support. 1 in 6 (17%) of the lowest income consumers are unable to cut back their spending any further. There is also a regional divide with those in Scotland (16%) and the Midlands (15%) unable to cut back further compared to just 8% in the South East.
More consumers are likely to find themselves needing to turn to food banks (5.8 million or 11%) or charity donations (5.2 million or 10%) for support in the next few months.
Those on the lowest incomes are most likely to intend to use a foodbank (16%) and charity donations (13%).
Hardship is not limited to just those on the lowest incomes. In our recent Viewpoint report, Economic woes worsen (fast), we reported that the group most likely to see the largest fall in living standards from energy price rises will be the “squeezed middle”.
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Our latest research shows that higher income consumers are more likely to have to take on extra work (27% vs 21% of all consumers) and extra debts (17% vs 13% overall) to absorb the rising energy costs.
Around 1 in 10 of those on medium and higher incomes say that they are likely to need to use a foodbank (10%) and even rely on charity donations (9%).
Cutting back on heating and eating
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Nearly 22 million are set to cut back on heating and eating in the next few months due to the rise in the energy price cap. This follows a forecast from Citigroup that inflation may reach 18.6% early next year.
IGD has forecast that food inflation will reach 15%, with a +/- 1% margin of error, by the autumn (see here). This compares to the current level of 12.7%.
Risk of further volume loss for food retail
In our latest Viewpoint report, we reported that with inflation running far ahead of previous expectations, the financial and psychological impact on consumers is severe and volume food sales have contracted. Consumers cutting back their spending is expected to result in further volume loss for food retail.
More than half (56%) plan to cut spend on food and grocery shopping and more than four in ten (44%) plan to cut the amount of food and drink consumed at home (smaller portions, missing meals).
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Those with the lowest incomes and who are unable to cut back spend further are most likely to be vulnerable to missing more meals and using food banks in the next few months.
Pressure on the eating out market
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IGD has forecast an extended period of low growth for the UK eating out market. The rise in the energy price cap is likely to put further strains on this market. The chart above reveals that consumers plan to cut back on the things they can with 71% planning to cut back on eating out.
Women (75% vs 66% of men), 35-44s (79% vs 66% of 18-34s), and those in Scotland (79% vs 63% in London) are most likely to plan to cut spend on eating out.
More than two thirds (68%) plan to reduce amount of food consumed when eating out. This is highest among 35-54s (77%) and those living in East Midlands (79%) and Scotland (77% vs 62% in London).
Viewpoint from IGD
These research results are bleak. The poorest in society are likely to be the hardest hit from the rise in the energy price cap. More of their budget is spent on essentials such as food, fuel and energy.
The existing support package from the Treasury will go some way to shield the most vulnerable households from the impact of rising energy bills, however, the Government will be unable to protect everyone from all price increases. Access to, and availability of, the most affordable food will be critical in allowing households to manage inflation. Businesses will need to be agile to align their offer with changing consumer preferences. Consumer will be looking for government and business to provide further support to help them contend with these cost of living pressures.
For both the food retail and eating out markets, communicating value will be crucial to retaining consumers who are cutting back on spending.
For more information
Download our free Viewpoint Special: Exploring the outlook for food inflation here
See IGD forecasts for the eating out market here
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