Introduction: Welcome to the squeeze

The “squeezed middle” is expanding. As inflation and economic uncertainty continue, it is only going to grow: even the relatively well-off may find they’re sucked in.

Of course, it’s always been a fairly elastic term. It was popularised a decade ago by former Labour leader and current Shadow Secretary of State for Climate Change Ed Miliband. In discussions with Miliband, its definition seemed to range from average wage earners to those on up to £100,0001.

Crucially, though, the squeezed middle was not about poverty and the impossible choices faced by those on very low pay or out of work. It describes the less acute but more widespread pressures of millions of middle-class families face due to inflation far outstripping wage rises. As Miliband put it at the time, it was a “crisis of living standards”.

That, though, was a time when inflation was still under 4.6% – well above the Bank of England’s inflation target but little more than half the rate today. In April, UK inflation hit 9%, a 40-year high2, and it’s expected to climb yet higher. By the end of the year, the Bank of England forecasts it will likely be in double figures and won’t return to close to its 2% target for around two years. With the Bank also warning of recession later this year, the ranks of the squeezed middle look set to swell further. Those whose wealth has insulated them from such challenges in the past may find they now also have to make some financial compromises.

In fact, new research from Hampshire Trust Bank shows this is already beginning to happen. Rising prices are seeing many with significant wealth still having to change their shopping habits, review financial plans and look hard at their saving arrangements. Based on a survey answered by more than 2,700 of our customers, we explored some of the changes in both spending and saving in response to the country’s economic challenges.

The survey shows not just the impact of rising prices but also suggests the importance of a diverse portfolio of savings and investment products: a blend that can provide not just returns but also flexibility to combat inflation and meet short and medium-term needs as they arise. We hope the findings prove interesting and maybe help those in the squeezed middle find strategies that will let them breathe a little easier.

Introduction: Welcome to the squeeze

The “squeezed middle” is expanding. As inflation and economic uncertainty continue, it is only going to grow: even the relatively well-off may find they’re sucked in.

Of course, it’s always been a fairly elastic term. It was popularised a decade ago by former Labour leader and current Shadow Secretary of State for Climate Change Ed Miliband. In discussions with Miliband, its definition seemed to range from average wage earners to those on up to £100,0001.

Crucially, though, the squeezed middle was not about poverty and the impossible choices faced by those on very low pay or out of work. It describes the less acute but more widespread pressures of millions of middle-class families face due to inflation far outstripping wage rises. As Miliband put it at the time, it was a “crisis of living standards”.

That, though, was a time when inflation was still under 4.6% – well above the Bank of England’s inflation target but little more than half the rate today. In April, UK inflation hit 9%, a 40-year high2, and it’s expected to climb yet higher. By the end of the year, the Bank of England forecasts it will likely be in double figures and won’t return to close to its 2% target for around two years. With the Bank also warning of recession later this year, the ranks of the squeezed middle look set to swell further. Those whose wealth has insulated them from such challenges in the past may find they now also have to make some financial compromises.

In fact, new research from Hampshire Trust Bank shows this is already beginning to happen. Rising prices are seeing many with significant wealth still having to change their shopping habits, review financial plans and look hard at their saving arrangements. Based on a survey answered by more than 2,700 of our customers, we explored some of the changes in both spending and saving in response to the country’s economic challenges.

The survey shows not just the impact of rising prices but also suggests the importance of a diverse portfolio of savings and investment products: a blend that can provide not just returns but also flexibility to combat inflation and meet short and medium-term needs as they arise. We hope the findings prove interesting and maybe help those in the squeezed middle find strategies that will let them breathe a little easier.

Shop where they drop

Not surprisingly for savers from a specialist bank, many of those in our survey have wealth well above the UK average. Across the country, 42% of families have no savings at all, and only 16% had savings and investments of over £30,0003. In our survey the average was £39,883.

Despite this, these individuals are far from immune from recent inflation and economic uncertainty. More than four in ten (41%) say they’ve cut back on luxuries like international flights, clothes and restaurants, and half (53%) say they’re being more careful with day-to-day spending, such as groceries shopping. The market leaders, Tesco (29%) and Sainsbury’s (20%) account for the lion’s share of shopping, but interestingly the budget brands Aldi (12%) and Lidl (9%) together have a significantly greater percentage of our sample than the traditionally high-end retailers Waitrose (8%) or M&S (3%).

Almost one in five (18%) also say they have changed where they buy groceries in the last six months, and of those, 22% said it was to reduce costs. Many also noted that the quality was comparable.

As one typical response put it:

I changed to ‘discount supermarkets’ as the price difference is noticeable and food quality [and] freshness is the same or in many cases better.

Of course, it’s not just groceries – much of the current inflation is driven by fuel and energy prices. Asked about their key financial concerns, utility bills were by far the biggest, named by 70% of those questioned, ahead of 53% worried about fuel prices and 51% concerned about the cost of food and drink (respondents could choose more than one option). Only 16% said they had no financial concerns.

Shop where they drop

Not surprisingly for savers from a specialist bank, many of those in our survey have wealth well above the UK average. Across the country, 42% of families have no savings at all, and only 16% had savings and investments of over £30,0003. In our survey the average was £39,883.

Despite this, these individuals are far from immune from recent inflation and economic uncertainty. More than four in ten (41%) say they’ve cut back on luxuries like international flights, clothes and restaurants, and half (53%) say they’re being more careful with day-to-day spending, such as groceries shopping. The market leaders, Tesco (29%) and Sainsbury’s (20%) account for the lion’s share of shopping, but interestingly the budget brands Aldi (12%) and Lidl (9%) together have a significantly greater percentage of our sample than the traditionally high-end retailers Waitrose (8%) or M&S (3%).

Almost one in five (18%) also say they have changed where they buy groceries in the last six months, and of those, 22% said it was to reduce costs. Many also noted that the quality was comparable.

As one typical response put it:

I changed to ‘discount supermarkets’ as the price difference is noticeable and food quality [and] freshness is the same or in many cases better.

Of course, it’s not just groceries – much of the current inflation is driven by fuel and energy prices. Asked about their key financial concerns, utility bills were by far the biggest, named by 70% of those questioned, ahead of 53% worried about fuel prices and 51% concerned about the cost of food and drink (respondents could choose more than one option). Only 16% said they had no financial concerns.

While the effects of inflation may not yet have hit home for many in terms of changing financial behaviour, one particular respondent stated their “circumstances haven’t changed, but [they] are more aware that they could in the next 12 months”. Another said they were waiting “to see what effect price increases, particularly energy costs, have after a few months."

Moreover, few expect things to get better – at least in the short-term. More than three-quarters of those surveyed already spend over £100 a month on utilities and a quarter (26%) over £200. Despite this, many expect steep rises. More than four in ten (41%) say they expect their current energy spending to increase by between 21-50% in the future, while almost three in ten (29%) expect their bills to increase by more than half or even double.

The findings make it clear that the increasing cost of living is being felt across income and savings brackets. The better off do not, of course, face the tragically difficult decisions of those worst affected, but almost everyone is having to think much more carefully about where and what they buy when it comes to food and fuel.

While the effects of inflation may not yet have hit home for many in terms of changing financial behaviour, one particular respondent stated their “circumstances haven’t changed, but [they] are more aware that they could in the next 12 months”. Another said they were waiting “to see what effect price increases, particularly energy costs, have after a few months."

Moreover, few expect things to get better – at least in the short-term. More than three-quarters of those surveyed already spend over £100 a month on utilities and a quarter (26%) over £200. Despite this, many expect steep rises. More than four in ten (41%) say they expect their current energy spending to increase by between 21-50% in the future, while almost three in ten (29%) expect their bills to increase by more than half or even double.

The findings make it clear that the increasing cost of living is being felt across income and savings brackets. The better off do not, of course, face the tragically difficult decisions of those worst affected, but almost everyone is having to think much more carefully about where and what they buy when it comes to food and fuel.

Could The Bank of Mum and Dad go bust?

Of course, there is always more that can be done, and with inflation set to continue and even increase in the coming months, further changes are likely.

To date, for instance, few have switched suppliers for their utilities – just 10% have changed in the last six months. Even among those who had switched, it was more often because their current supplier went bust (38%) than because they found a better deal (23%) or switched to a fixed rate (9%).

Despite rocketing fuel costs, nearly half (48%) haven’t changed their driving habits either, and only one in ten (10%) say they’re likely to switch to an electric vehicle.

In fact, though, that’s probably because these options have been unlikely to be much help in the short-term. The price cap on energy tariffs, for instance, means there’s been little benefit from switching suppliers while prices are so high4. Electric cars, meanwhile, require a substantial outlay – the most common reason for those saying they were unlikely to make a switch was that it would cost too much (41%), while others complained about the lack of infrastructure, such as charging stations.

Some can cut down on driving; indeed, almost a quarter (23%) say they now only drive when absolutely necessary. But that’s not an option for everyone. Those in rural areas or where public transport is poor will necessarily remain reliant on their cars for work and essential journeys.

Instead, making a real dent in outgoings could require more drastic action, which many are still resisting.

Reflecting the preponderance of “The Bank of Mum and Dad” in supporting first-time buyers in recent years, it’s unsurprising that a significant number have planned on helping their children to buy. Of those who haven’t already provided help and have appropriately-aged children who don’t own, 30% planned to help by either buying outright (4%) or contributing to a deposit (26%). However, a further 13% had intended to help but either delayed their plans (6%) or abandoned them (7%) due to the cost of living crisis.

Could The Bank of Mum and Dad go bust?

Of course, there is always more that can be done, and with inflation set to continue and even increase in the coming months, further changes are likely.

To date, for instance, few have switched suppliers for their utilities – just 10% have changed in the last six months. Even among those who had switched, it was more often because their current supplier went bust (38%) than because they found a better deal (23%) or switched to a fixed rate (9%).

Despite rocketing fuel costs, nearly half (48%) haven’t changed their driving habits either, and only one in ten (10%) say they’re likely to switch to an electric vehicle.

In fact, though, that’s probably because these options have been unlikely to be much help in the short-term. The price cap on energy tariffs, for instance, means there’s been little benefit from switching suppliers while prices are so high4. Electric cars, meanwhile, require a substantial outlay – the most common reason for those saying they were unlikely to make a switch was that it would cost too much (41%), while others complained about the lack of infrastructure, such as charging stations.

Some can cut down on driving; indeed, almost a quarter (23%) say they now only drive when absolutely necessary. But that’s not an option for everyone. Those in rural areas or where public transport is poor will necessarily remain reliant on their cars for work and essential journeys.

Instead, making a real dent in outgoings could require more drastic action, which many are still resisting.

Reflecting the preponderance of “The Bank of Mum and Dad” in supporting first-time buyers in recent years, it’s unsurprising that a significant number have planned on helping their children to buy. Of those who haven’t already provided help and have appropriately-aged children who don’t own, 30% planned to help by either buying outright (4%) or contributing to a deposit (26%). However, a further 13% had intended to help but either delayed their plans (6%) or abandoned them (7%) due to the cost of living crisis.

The other side of the equation: Income and assets

If you can’t or don’t want to cut costs further, you have to look to earnings and assets. For those on fixed incomes, particularly the 49% who are retired, the opportunities to do so are limited to making their money work harder.

And that’s precisely what many are doing. While only 5% say they’ve stopped saving to maintain their lifestyle, more than half (52%) have switched savings to a different product. One respondent stated that they “often look at the best interest rate and swap” where they keep their savings.

So far, that’s been a successful strategy for many. From the start of 2020 to the beginning of 2022, 27% said the value of their savings and investments had increased.

Going forward with an uncertain economic outlook, they may find they have to redouble their efforts.

The other side of the equation: Income and assets

If you can’t or don’t want to cut costs further, you have to look to earnings and assets. For those on fixed incomes, particularly the 49% who are retired, the opportunities to do so are limited to making their money work harder.

And that’s precisely what many are doing. While only 5% say they’ve stopped saving to maintain their lifestyle, more than half (52%) have switched savings to a different product. One respondent stated that they “often look at the best interest rate and swap” where they keep their savings.

So far, that’s been a successful strategy for many. From the start of 2020 to the beginning of 2022, 27% said the value of their savings and investments had increased.

Going forward with an uncertain economic outlook, they may find they have to redouble their efforts.

Not so simple: The case for cash

Traditionally, of course, the best protection against rising inflation has been investing in stock markets and other risk-based assets. No cash account is going to outpace double-digit price increases.

And most do have exposure to these sources of return: almost two thirds (64%), for instance, say they have had investments, excluding pensions, in bonds, ISAs, stocks and shares and property in the last three years. Almost a fifth have more than half their money in investments, again excluding pensions.

At the same time, however, most of our savers continue to have significant assets in cash products, whether fixed-term accounts or instant-access cash savings.

Not so simple: The case for cash

Traditionally, of course, the best protection against rising inflation has been investing in stock markets and other risk-based assets. No cash account is going to outpace double-digit price increases.

And most do have exposure to these sources of return: almost two thirds (64%), for instance, say they have had investments, excluding pensions, in bonds, ISAs, stocks and shares and property in the last three years. Almost a fifth have more than half their money in investments, again excluding pensions.

At the same time, however, most of our savers continue to have significant assets in cash products, whether fixed-term accounts or instant-access cash savings.

First, stock markets such as the FTSE have now recovered from the collapse at the start of the pandemic, and the economic outlook is highly uncertain. There will be some understandable nervousness about the prospects for risky investments in the future, particularly since only a minority (14%) say they’ve cashed in any of their assets in the last two years. The uncertainty of shares is likely to be particularly unattractive to those in retirement. This is reflected in some respondents’ responses, one of whom even stated that they are “limiting [my] exposure to the stock market.”

Second, as we’ve seen, many still have plans to help loved ones with big purchases, such as house buying. Again, this is money that savers will be keen to protect from the stock market volatility – particularly given that house prices are slowing even while inflation increases. 

Finally, inflation itself can generate the need to hold more in cash if households more frequently have to draw on savings to meet the cost of luxuries, bigger purchases or day-to-day spending that their income no longer always covers.

For these and other reasons, most savers report holding significant cash savings.

When considering their outgoings and potential for unexpected additional costs, a quarter said they would need over £100,000 in cash savings to feel financially secure – including a majority of those earning £100,000 or more.

Conclusion: A portfolio approach to saving

If the recent squeeze on living standards hasn’t diminished the need for cash, it has increased the imperative to look carefully at options for cash saving. At its simplest, increasing interest rates and rising prices have increased both the opportunities to get better returns on cash and the risks of failing to do so, as inflation eats away at the money’s value. Despite this, more than a third say they have no plans to change how they save (37%) or, more seriously, haven’t considered their options (16%).

Given the large deposits that many people still have with big traditional high street banks – usually on relatively poor rates – that could be a mistake.

And it’s not just interest savers will be looking at but also, as we’ve seen, access. Even for the portion of savings they don’t need in the short-term, savers may be unwilling to lock it away for too long, given uncertainties over the speed and extent of future rate rises. Meanwhile, those with more than £85,000 in cash savings will also be looking to spread their cash across several accounts to ensure all their money benefits from the FSCS deposit protection guarantee5.

Our survey confirms that customers have a range of considerations when deciding where they put their money. That includes rates, of course, but also access and flexibility, managing risk and customer service – more than ever in this period of uncertainty, when customers have a question or need and pick up the phone, they want to know someone will answer and have their best interests at heart.

The findings underline the importance of a balanced approach to investment and savings – and not just between equities, other risk assets and cash to ensure diversification, long-term capital growth and liquidity to meet expenses as they arise, but in the cash portfolio itself. Savers need a mix of short-term instant access savings to meet expected and unexpected needs; and fixed-rate savings to meet medium and longer-term needs, providing greater mitigation against inflation without risking capital sums.

Because if there’s one thing the last few years have probably taught us, it’s that there’s value in certainty.

Conclusion: A portfolio approach to saving

If the recent squeeze on living standards hasn’t diminished the need for cash, it has increased the imperative to look carefully at options for cash saving. At its simplest, increasing interest rates and rising prices have increased both the opportunities to get better returns on cash and the risks of failing to do so, as inflation eats away at the money’s value. Despite this, more than a third say they have no plans to change how they save (37%) or, more seriously, haven’t considered their options (16%).

Given the large deposits that many people still have with big traditional high street banks – usually on relatively poor rates – that could be a mistake.

And it’s not just interest savers will be looking at but also, as we’ve seen, access. Even for the portion of savings they don’t need in the short-term, savers may be unwilling to lock it away for too long, given uncertainties over the speed and extent of future rate rises. Meanwhile, those with more than £85,000 in cash savings will also be looking to spread their cash across several accounts to ensure all their money benefits from the FSCS deposit protection guarantee5.

Our survey confirms that customers have a range of considerations when deciding where they put their money. That includes rates, of course, but also access and flexibility, managing risk and customer service – more than ever in this period of uncertainty, when customers have a question or need and pick up the phone, they want to know someone will answer and have their best interests at heart.

The findings underline the importance of a balanced approach to investment and savings – and not just between equities, other risk assets and cash to ensure diversification, long-term capital growth and liquidity to meet expenses as they arise, but in the cash portfolio itself. Savers need a mix of short-term instant access savings to meet expected and unexpected needs; and fixed-rate savings to meet medium and longer-term needs, providing greater mitigation against inflation without risking capital sums.

Because if there’s one thing the last few years have probably taught us, it’s that there’s value in certainty.

Report produced by Rostrum agency