Households ‘borrowing more and saving less’ amid surging inflation

Households are borrowing more and putting less money into savings, according to Bank of England figures.

Some experts pointed to the statistics as evidence of people trying to maintain their lifestyles as their incomes are battered by high inflation.

Experts also said the figures suggest that householders are starting to dip into extra savings built up during the pandemic as they juggle rising bills.

Consumer credit, which includes borrowing on credit cards, personal loans and overdrafts, increased by 1.4% annually in December 2021, accelerating from 0.8% in November, the Bank’s Money and Credit report said.

It marked the strongest annual growth in consumer credit borrowing since the start of the UK lockdowns in March 2020.

Within the latest total, credit card borrowing increased by 2.0% annually.

Households also deposited £3.2 billion into banks, building societies and NS&I (National Savings and Investments) accounts in December.

This was lower than the amount of money typically deposited pre-pandemic, which averaged £5.5 billion per month in the year to February 2020.

Thomas Pugh, an economist at 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.

“Normally, a rise in consumer credit is a good indication that consumption is growing strongly because it tends to expand when the economy is good. People feel confident enough to borrow and splurge on big ticket items, such as cars.

“However, this time may be different. 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 £0.8 billion increase in consumer credit in December was due to consumers buying more goods.”

Households had been putting larger amounts of cash away earlier on in the pandemic.

In the year to November 2021, the average amount being deposited per month stood at £10.6 billion.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “The £3.2 billion increase in households’ total liquid assets was smaller than the £4.9 billion average increase seen in the two years prior to the pandemic, implying that households have begun to draw down their ‘excess savings’.

“We judge that this reflects households attempting to support their current level of expenditure while their real disposable incomes are being battered by high inflation, rather than a positive shift in consumers’ sentiment.”

Karim Haji, head of financial services at KPMG UK, said: “From a household finances perspective, the personal loan interest rate is the measure to watch this year.

“Typically, unsecured loans are the ones consumers default on first and a rising rate would be a sign that banks are worried about the gloomier consumer outlook.”

Some 71,000 mortgage approvals were also made to home-buyers in December, which was above the 12-month average up to February 2020 of 66,700.

The number of approvals for remortgaging with a different lender rose slightly, to 44,900 in December.

The Bank said this remains low compared with the 12-month average to February 2020 of 49,500, but is the highest since February 2020 (52,500).