(Bloomberg) -- Britons are indulging in small mood boosters as they brace for a tough budget next month.
Consumers spent 7% more on high-end perfumes in August than a year earlier, shunning cheaper alternatives, according to an analysis of online shopping data by Adobe Digital Insights. When it came to staples such as appliances and clothing, they bought more of the cheapest items.
It illustrates the “lipstick effect” coined in 2001 by Estée Lauder heir Leonard Lauder to describe how consumers resort to affordable luxuries to lift their mood in uncertain economic times. It was seen last year when Britain was in recession. This time it comes amid warnings from the new Labour government about the decisions that need to be taken to fix the public finances.
Prime Minister Keir Starmer’s hints of pain to come in the Oct. 30 budget have spooked consumers who were enjoying rising real incomes and the first Bank of England interest-rate cut since the pandemic. Confidence plunged the most in two-and-a-half years this month. Labour has tried to soften its message in recent days amid concerns it was undercutting its own growth ambitions.
“Households are wary of potential tax hikes,” said Nicholas Found, senior consultant at Retail Economics. “Retailers with a balanced premium and mass-market offering are tapping into a shift to affordable luxuries.”
The average household spent around £1,534 ($2,050) in September on bills and outgoings, a 2.4% real-terms increase compared with the same period last year, according to a MoneySuperMarket survey. Most of that rise was driven by spending on non-essentials like subscriptions for streaming services. The average spend on gym memberships more than tripled to £51 a month, suggesting people are shifting to premium sports centers.
Barclays Plc card data released last month showed that almost half of Britons were indulging in comfort purchases like cosmetics and sweet treats while making cutbacks elsewhere. Spending at health and beauty retailers was up 7.3% year-on-year, the fastest growth since early 2023.
A rise in sales volumes recorded in official data was partly due to end-of-season discounts at supermarkets and clothing stores.
While Labour’s budget is still a few weeks away, anxiety levels are running high. Chancellor of the Exchequer Rachel Reeves has already withdrawn winter fuel subsidies for about 10 million pensioners, while warning of further spending cuts to come after discovering what she claims is a £22 billion hole in public finances.
Research firm GfK’s monthly gauge of consumer confidence dropped the most since Russia’s invasion of Ukraine, with households indicating they’re delaying big-ticket purchases amid growing pessimism about their outlook.
Confidence posted even more dramatic falls for households making less than £50,000 a year, according to Tera Allas, director of research and economics at McKinsey UK & Ireland.
With businesses also showing apprehension about going ahead with investment, Reeves tried to project a more positive vision for the country in her speech to the Labour Party conference in Liverpool on Monday.
The problem is not consumers lacking the cash, but rather the confidence to spend it. The saving ratio, the proportion of disposable income that households choose not to spend, has climbed well above the long-term average in recent months. Unlike in the US, consumer spending in the UK remains below pre-Covid levels.
“The broader consumer story since the start of the year has been characterized by ongoing caution despite healthy real wage gains,” Dan Hanson, chief UK economist Bloomberg Economics, said in a note.
Consumption matters because it accounts for two thirds of economic output. The rapid recovery from last year’s recession is already fizzling out, and some retailers are starting to worry that downbeat households won’t show up in the crucial months leading up to Christmas.
A backdrop of budget gloom, slowing pay growth and vacancies becoming scarcer is bad news for families gearing up for a 10% increase in energy bills come October. Households are still spending more on everyday essentials like food and housing than pre-Covid after the worst bout of inflation in decades.
“Clearly, the high cost of living still bears down on consumers, meaning demand may dip further when energy bills rise once again in October,” said Kris Hamer, Director of Insight at the British Retail Consortium.
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