Baby boomers drive soaring UK inflation

Rishi Sunak aims to halve inflation this year, but he confronts a significant challenge from a crucial voting bloc he relies on for support: the baby boomers.

These individuals, born between 1946 and 1964, now aged 59 to 77, are contributing to sustained high inflation due to their considerable spending. With robust pensions or stable jobs and benefiting from rising interest rates on their savings, millions of baby boomers persist in their spending patterns despite prevailing economic concerns.

Recent official figures showed that annual inflation remained at 6.7% in September, unchanged from August, contrary to expectations of a slight decrease. Sunak’s objective to slash last year’s 10.7% rate by half by the end of 2023 seems increasingly challenged.

Many baby boomers have secured strong financial positions through decades of advantageous economic circumstances. They’ve benefited from free higher education, rising property values, policies like the right to buy, a flourishing job market, and the bolstering of defined benefit pension schemes, ensuring relative financial security as they enter their elderly years.

The pensions triple lock, assuring an increase aligned with the highest among average earnings, inflation, or 2.5%, has further solidified this financial safety net. However, government officials are considering deviating from the pensions triple lock, contemplating a one-time adjustment to prevent a substantial 8.5% rise in the state pension next year, aiming to save £1 billion.

With interest rates climbing in 2021, hitting 5.25% in August, the Bank of England anticipates that savings rates will remain high for an extended period, continuing to encourage spending among baby boomers well into 2024. The Resolution Foundation notes that baby boomers are the primary recipients of an unexpected financial gain, with an estimated £90 billion set to be distributed in the upcoming year from £1.7 trillion in interest-bearing savings.

The recent offering from Nationwide, presenting an 8% interest rate on deposits for current account holders, highlighted a significant surge in purchasing power for savers. Santander and First Direct also provide 7% interest, an exclusive deal for their current account holders.

While baby boomers make up 13.14 million of the UK’s 67 million population, according to the latest Office for National Statistics (ONS) figures, it’s essential to recognize that other segments of the population haven’t experienced similar financial gains in the past year. Specifically, low- to middle-income families have faced income stagnation or decline when adjusted for inflation.

Recent data indicates substantial pay rises for individuals in the financial sector in the City and senior commercial managers. However, considering the average spending nationwide across all age groups, the overall trend shows a decrease.

Although UK-specific age-related spending data is limited, more comprehensive surveys in the United States reveal notable patterns among baby boomers. A Bank of America Institute study for the year up to May demonstrated a 0.2% decline in household spending. Yet, when scrutinizing the data by generation, it unveiled a 5% spending increase among individuals over 75 and a 2.5% increase among baby boomers. Conversely, Generation Z (born in the late 1990s and early 2000s) experienced a 2% spending decrease, largely due to student loan repayment burdens.

In the upcoming sections, we’ll spotlight how baby boomers, based on official data and business surveys, significantly bolster various sectors of the economy, contributing to the ongoing challenge of high inflation.

Housebuying

The UK’s housing sector is displaying signs of improvement after a challenging period marked by price drops and limited property transactions. According to figures from the Office for National Statistics (ONS), estate agency activities witnessed a slight decline, with a 0.01% drop in the initial quarter and a further 0.03% decrease in transactions by June’s end.

A cautious recovery seems evident, with the average house price in the UK rising by 0.2% in August to hit £291,000, nearing the peak recorded in November 2022 at £292,187.

There’s a noticeable scarcity of first-time homebuyers, as the market is notably driven by individuals aged over 50. Outra, a property data firm, notes a significant shift in the average age of homeowners planning to relocate in the next six months, showing a 3.5-year increase since 2022, now averaging at 52.5 years.

Additionally, a significant majority of those intending to relocate possess substantial deposits, with a considerable number having equity of at least £250,000 invested in their homes, according to the pre-mover index of the company. This indicates that the majority of potential buyers are likely to be considerably older and more affluent compared to the typical homebuyer.

Giles Mackay, the founder of Outra, voiced concern about this emerging trend, suggesting that the UK’s housing market is increasingly becoming dominated by older and wealthier individuals. He raised the notion that this transition might signal the beginning of an “inheritocracy.”

Regarding holidays:

Ryanair is set to achieve record profits due to a surge in flight and vacation bookings during the summer season. Winter holiday plans are also filling up quickly. Official data suggests that while the number of individuals traveling abroad for vacations remains lower than pre-pandemic levels, the spending reached record highs. Some of this increase can be attributed to higher airfares, which no longer offer the affordable prices once favored by many millennials for short-haul weekend getaways.

Another factor contributing to this shift is the post-pandemic preference for more luxurious and aspirational vacations. According to Saga, a company catering to individuals over 50, their interim report published in September 2022 revealed that 15.8 million travelers embarked on an average of 3.3 trips annually, totaling 52 million holidays.

Moreover, research suggests that two-thirds of these over-50s expressed intentions to take between two and four vacations in 2023, with a quarter planning five or more trips during the year. A majority (55%) of respondents reported that the cost of living crisis did not impact their holiday plans, and 14% stated they intended to spend more than £5,000 per person on their primary holiday.

Saga’s data highlights a 17.1% increase in the number of holidaymakers this year compared to the previous year, with the US, Canada, and Australia ranking as top long-haul destinations. Popular short-haul options include France, mainland Spain, and Italy.

Condor, a ferry operator based in Guernsey, revealed that 82% of baby boomers planned to take between one and five leisure trips in 2022. Anecdotal evidence suggests that vacations have become “longer and more distant,” with travelers opting for cruises to the Caribbean or the Nordics instead of round-Britain cruising, according to a travel expert.