UK consumer confidence plunges 11 points, fastest fall since Brexit vote, as cost of living bites before budget

Consumer confidence in the UK fell by 11 points in October, to -24, according to the latest monthly barometer from the data company GfK. Outside the Covid pandemic, it is the sharpest one-month drop since July 2016, when the shock result of the EU referendum rattled households. The cause this time, GfK and others say, is the escalating economic damage from the war in the Middle East.

The timing is awkward for the government. John Healey, the chancellor, delivers his first budget on Wednesday, less than a week away, under a prime minister, Andy Burnham, who took office this summer. GfK noted that the summer had brought a "Burnham bounce", helped along by a strong World Cup run for the men's England football team and some sunny weather. That lift has now gone.

The index has been watched closely by the government and the Bank of England since the early 1970s as an early warning of trouble in the economy. Its largest fall ever, 25 points, came in March 2020, just after the first UK lockdown began. Neil Bellamy, GfK's consumer insights director, said relentless cost-of-living pressures, set against unresolved regional conflicts that are themselves feeding domestic inflation, now at 3.5%, appeared to have swept aside the nascent optimism that followed the appointment of a new prime minister.

The squeeze is concrete. Petrol and diesel prices have surged close to record highs, and energy bills have gone up ahead of what is expected to be a difficult winter. There are warnings that the typical household's energy bill could reach £2,000 a year from January. Analysis by the Trades Union Congress shows UK households have paid almost £14,000 on average over the past five years in additional costs for mortgages, loans, energy and water bills.

Within the GfK survey, people grew less confident about their own finances and about the outlook for the British economy as a whole. The major purchase index fell 14 points to -22, which suggests households may be preparing to cut spending over the winter to leave room for higher energy bills.

Official figures published on Wednesday made the chancellor's position harder. Headline inflation rose by more than expected to 3.5% last month, and the government deficit came in at £24.5bn, worse than forecast. Healey has pledged to announce "breathing space" measures to ease the pressure on households, but has also warned that the government has limited resources, with the Middle East conflict pushing the UK's borrowing costs to their highest level in decades.

Businesses are under strain too. Separate CBI figures show investment intentions among manufacturers were subdued in the three months to October, with cost pressures still high. The CBI's Industrial Trends Survey expects manufacturing output to stabilise over the next three months. Cameron Martin, the CBI's senior economist, said that if the government wants to tackle the cost of living meaningfully, it must give manufacturers room to invest and drive the productivity growth needed to sustain rising real wages. He called on next week's budget to cut business electricity costs, reduce labour costs and reform business rates. The Treasury has been approached for comment.

What to watch on Wednesday is whether the promised breathing space is large enough to offset energy bills heading toward £2,000, and whether the winter spending pullback that GfK's figures hint at comes to pass.