Inflation Saps UK Consumer Confidence

Autumn 2023

We’ve been tracking UK consumer sentiment every quarter since October 2018 (an eventful few years, you’d have to agree). The quarterly reports are available on our website, but in this article we’re going to take a more in-depth look at the overall trend and some of the key differences that sit behind it. 

Consumer sentiment, the economy, and the news

In this chart we’ve traced out the movement of the overall Index of Consumer Sentiment (ICS). We’ve seen some huge ups and downs, although if the US equivalent that we based our measure on is a reliable guide, even the highpoint of Q1 2020 is a relatively low score in a longer historical context. 

As a reminder of the timeline, we’ve included some key events that might be expected to impact consumer sentiment either directly or indirectly.

The ICS reflects both current economic conditions and consumers’ feelings about the future, and these are tracked in the two subindices—the Index of Current Economic Conditions (ICC) and Index of Consumer Expectations (ICE).

From 2018 through to the end of 2022 ICC was higher than ICE. In other words, consumers were worried about the future, but still reflecting a personal experience that had not been too strongly affected by these wider events and trends. There were exceptions to this overall picture, and one of the things we’ve seen since the start of the pandemic is that the financial impact of issues such as lockdown or the cost of living crisis are felt very differently by different types of people. As a rule, gaps between demographic groups widen as overall sentiment falls.

On average, though, consumers were more positive about their current financial situation than they were about the future. As shown below that changed in 2023, as the cost of living crisis really took hold.

Zooming into the individual questions behind the indices, we can see how optimism about the UK economy in both the short and long term has fallen off rapidly between Q2 and Q3 2023.

Consumer sentiment is lower when inflation is higher

One specific connection we’ve found based on our historical data is that there is a strong negative correlation between consumer sentiment and inflation as measured by CPI, in other words consumer sentiment tends to be lower when inflation is higher.

Who are the most confident consumers?

In each quarter’s report we break down the sentiment scores for different groups of customers, and we’ve learned that the most confident consumers tend to:

  • Be under 45

  • Be male

  • Have a postgraduate level of education

  • Own their home

  • Have a household income over £40,000

  • Have more savings than debt

But what makes the most difference? Taking data from Q3 2022 to Q3 2023 we used a decision tree [1] approach to identify those likely to be most and least confident. Age (with a cut point at 45) is the most important driver, followed by consumers’ debt/savings position.

What next for the Index of Consumer Sentiment?

We’ve seen that the Index of Consumer Sentiment correlates with macroeconomic indicators, and can give a nuanced picture of how consumers are feeling about events in the news as well as their own financial situation. We also know that it links strongly to their behaviour and the choices they make about how to spend their money. It is something that anyone whose strategy depends on the confidence of the UK consumer (either directly or indirectly) needs to know about.

We’re always looking to add more to the analysis so that the index is as useful and informative as it can be, so let us know if there’s anything you think we’ve missed.

[1] Conditional inference trees – a method that works by finding the most important variable and the best cutpoint to divide customers into two groups at each step.

Stephen Hampshire

Client Manager
TLF Research