Consumers are cutting back but cost of living crisis means payday borrowing is on the rise

Britons are taking steps to reduce their personal inflation but it can’t stop a looming debt crisis, says James Moore

Roughly one in five Britons are engaging in ‘desperation borrowing’ (Getty/iStock)

Consumers are growing cautious.

The CBI distributive trends survey reports an “average” May but has warned of a “weak” outlook amid rising inflation and nervy consumers. Retailers have responded by reigning in investment plans.

The latest Kantar survey of the nation’s shopping baskets has found that food inflation hit 7 per cent over the past four weeks, its highest since May 2009. Aldi and Lidl, with their lower price but restricted choice strategies, were once again the sector’s fastest-growing grocers. Tesco, with its comparatively aggressive price-matching strategy, also did well.

Consumers are very obviously taking steps to reduce their personal inflation.

Then there’s the trouble at the Klarna (money) mill.

The rampaging buy now pay later firm – whose bright pink logo is a staple of online, and increasingly high street, retail – has hit the buffers hard.

Ten per cent of a 7,000-strong global workforce is facing redundancy on recession fears. Redundancies are never to be welcomed, they are a tragedy for those involved, but Klarna is a controversial business with good reason.

It offers a form of credit that doesn’t look like credit. Buy now pay later facilities are short-term loans for consumer goods masquerading as something else.

True, they don’t carry interest; the group makes its money through commission from participating retailers. But it is still a provider of loans, as anyone who doesn’t pay their bill when due will quickly discover.

This point was underlined earlier this month when Klarna said it would begin providing information to credit reference agencies – something that is not currently required but really ought to be. Klarna is but a part of this industry, and not the worst part (although its chief executive’s claim of wanting to be the ‘Tesla of retail banking’ is fairly crass; the world could do without another Elon Musk, for starters).

It is clear, and welcome, that Britons are responding to the inflationary pressures – but concerns are rising about consumer debt all the same.

A recent survey by the Office for National Statistics found that nine in 10 adults experienced a rise in their cost of living in March. Nearly a quarter (23 per cent) reported that it was either very difficult or difficult to pay their usual household bills in the last month. The same figure in November was 17 per cent.

But here’s the killer: nearly one in five (17 per cent) said they had borrowed more money or used more credit than they did a year ago.

Meanwhile, debt charity StepChange says household bills are the third most-cited reason for taking out debt in March, up from fourth in February and sixth throughout 2021.

Kantar’s Pressure Group survey, conducted among 9,362 households in April, found that 22 per cent of respondents described themselves as “struggling”.

From these varying numbers, it seems fair to say that roughly one-fifth of the country is turning to “desperation borrowing”.

Worse still, the number is going to rise as inflation continues to eat into household budgets and pushes more and more people below the waterline.

Klarna’s service is a small part of a potentially combustible mix.

Such “easy” credit can feed into deepening credit problems. If you’re already struggling, if you’ve suddenly found yourself borrowing to pay energy bills, or food bills, it is a way of putting off a day of reckoning with other essentials such as the clothes your children may need for school. Trouble is, there’s no way of putting it off forever.

The rise in desperation borrowing is deeply concerning. Just as troubling is the lack of attention being paid to it by policymakers, especially with Ofgem warning an £800 rise in fuel bills to a staggering £2,800 is coming in the autumn. That needs to change. We are looking at the beginnings of a debt timebomb. And it is ticking. In the absence of a policy response, the consequences could be grim indeed.