Since 2020, UK household spending has only increased by 1.1% and 3% per capita. Compared to neighbouring countries such as the US (12.7%) or Italy (3.2%), it is clear that households are looking to save rather than spend.
Before COVID, household expenditure accounted for two-thirds of the UK’s GDP, which steadily grew for 6 years. The sudden inflation shock and high-interest rate dampened household confidence drastically, with the savings ratio at 10.7 in the second quarter of 2025, double the average of 5.6.
This dilemma is confusing among economists and the Bank of England (BoE). If the BoE decided to follow a path of interest rate cuts, it would pose a risk of demand-pull inflation where households start to borrow to spend more. Carrying such risk would be damaging to the BoE’s reputation and also to the UK economy, given that it has just come out of the cycle.
Loss Aversion in Economics
A theory that behavioural economics can point out is loss aversion. With many worried about further job losses, higher future taxes and potential inflation, we can suggest that households have become risk-averse in spending. Despite the resilience of the UK economy and its recovery being projected to be one of the highest within the G7, households have placed a greater emphasis on savings for a rainy day rather than going out to spend.
This shift in behaviour creates a puzzle for the BoE. As households become more price-conscious, it is vital for the BoE to strike a balance between price stability and employment. Longer high rates cause businesses to defer spending, resulting in cost pressures, which may mean lower labour demand and higher supply. This negative externality results in higher unemployment, which is detrimental to society.
What we are looking here may set the trend for generations to come.
Econ Oddities 
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