As the economy is starting to recover, there has been a ferocious debate about the cost of living and the squeeze this has forced on middle-income families.
Ed Miliband’s speech today was full of references to households’ worries about bills and rising prices. But how households actually react to and cope with the squeeze is discussed much less.
Yesterday, the Social Market Foundation published a report that tracked actual middle income households over time. We found a significant level of resilience among households. Those who stayed as middle income families often sent an extra person out to work. They also made changes to their spending to cope with rising prices. Whilst food prices rose by around 25% from 2007-08 to 2011-12, and the cost of meals from restaurants and cafes rose around 16%, our middle income households managed to keep the rise in overall food spending to around 10%, below inflation.
Given that Government is less than halfway through its spending cuts programme, and all the major parties are committed to cuts in the next parliament, there will be less room for more state spending to help middle income families. But the resilience that these families displayed in coping with food spending shows that households and consumers can be savvy in managing their spending. If consumers could outperform the market is this way in other sectors, it would be much easier for households to manage current – and any future – rises in the cost of living. This is not about switching processes: 85-95% of switchers across a range of markets found the process easy. Instead, we need to do much more to help consumers cope in markets where making comparisons and choosing the right product is much harder. This includes, among others, energy, current accounts, savings, loans, and telecoms.
Remarkably, even those who do switch are not confident that they have made the right choice. This morning, I attended a thought-provoking Which? event on ‘Real Consumers’. Which? research looking at consumers who had switched current accounts found that 44% were unsure as to whether the account they had chosen was the best one for their needs. People find it hard to compare products – they take shortcuts such as focusing on just one aspect such as price, use rules-of-thumb such as brand familiarity, and pay too much attention to “rewards and incentives” like cashbacks. In the exciting world of behavioural economics, where common traits have complicated names, these are known as “behavioural biases”.
A speaker at the same events noted that, contrary to the view often taken by regulators and consumer groups that firms “exploit” behavioural biases to make more money, actually, firms tend not to have banks of behavioural economists working out how to do this. He’s right. They don’t. But behavioural economics was born out of economists starting to take an interest in sales and marketing. And I’m pretty sure most large firms do not skimp of that area of the business. The trouble is, consumers like upfront rewards and fun-sounding extras like cashbacks. So that is what firms give them. And that is partly why pricing is complicated, and working out the total cost of a product is hard.
This is where initiatives such as midata could have a big impact, in two ways. Firstly, applications and services that use a consumer’s actual usage data to cut through complicated pricing structures and work out the best deal make comparisons much less complex. Secondly, by focusing on how usage affects overall cost, they can also provide a counterpoint to stop consumers being distracted by exciting-sounding incentives that come with higher costs down the line.
To state the obvious, midata will not fix all markets. It will not even fully fix some of them. In many cases, where the market structure itself works to constrain choice and competition, more direct Government action will be needed. But it is a step in the right direction. Amidst all the talk of the squeeze and the cost of living, we must not underestimate what households and consumers can do, once they are equipped with the tools and information they need.
