Source > Economics Observatory
By Charlie Meyrick
22 June 2022
Prices in the UK continue to rise. New data from the Office for National Statistics (ONS) show that the consumer price index (CPI) is now at 9.1% – the first time it has reached this level since March 1982. This is up from 9% last month.
The consumer price index including owner occupiers’ housing costs (CPIH) – the most comprehensive measure of inflation – rose by 7.9% in the 12 months to May 2022. This is up from 7.8% in the 12 months to April (see Figure 1).
Figure 1: CPIH, CPI and OOH inflation rates (May 2012 to May 2022)
Note: CPIH – consumer price index including owner occupiers’ housing costs; CPI – consumer price index; OOH – owner occupiers’ housing costs
There are several underlying factors driving up the indices (see Figures 2a, 2b). Soaring utility bills mean that the largest contributor to the CPIH rate was household services (at 2.79 percentage points).
Transport costs are also a key driver (at 1.5 percentage points), with the price of petrol continuing to rise. The average price recently hit £1.89 per litre in the UK. Similarly, diesel costs climbed to a new high of £1.96 per litre and may soon reach an average of £2 at pumps across the country.
Figure 2: Contributions to the 12-month CPIH rate (May 2020 to May 2022)
Panel A: CPIH rate, percentage point change
Panel B: Contributors, percentage point contribution
According to the ONS, the contributions from housing/household services and transport account for 4.29 percentage points of the latest CPIH figure. This is more than half of the CPIH 12-month inflation rate for May 2022, with their combined weight comprising 42.5% of the basket.
This is partly due to the increase in the cap on energy prices on 1 April 2022. According to the Office of Gas and Electricity Markets (Ofgem), which determines the cap, people on standard energy tariffs, paying by direct debit, will see their utility bills rise by £693 (from £1,277 up to £1,971 per year). For those on prepayment plans, bills will go up by £708 (from £1,309 up to £2,017). The increase is driven by a record four-fold rise in global gas prices over the last six months, driven largely by the Russian invasion of Ukraine.
The war has also led to a substantial rise in the prices of wheat, sunflower oil and fertiliser, pushing up the cost of food products for consumers all over the world. In the UK, food and non-alcoholic drinks contributed 0.78 percentage points to the May CPIH figure, up from 0.61 in April and 0.39 in January (before the invasion).
What does this mean for the cost of living crisis?
The growing costs of utility bills, petrol and food are a major concern for low-income households in the UK. It is estimated that the average annual grocery bill could rise by as much as £380 this year. For people counting every penny to make ends meet, this will be a substantial challenge to their financial security.
Lower-income households typically spend a greater share of their income on energy and food. This means that when these products go up in price, this group is hit particularly hard. People on lower pay are also less likely to have savings to fall back on and may resort to eating less or not heating their homes. This poses a serious health risk, particularly for children and older people.
There is already clear evidence that many people in the UK cannot afford to feed themselves adequately. Food bank use in the UK is surging, with the Trussell Trust reporting that it delivered 2.1 million food parcels in the year to April 2022, with 830,000 of those going to children.
How might the situation develop over the coming months? With the Bank of England forecasting that inflation could reach an annual rate of more than 11% later this year, and with energy prices set to spike again in October ahead of colder winter weather, the cost of living crisis represents a major challenge for UK policy-makers.
The Bank has already increased interest rates (from 1% to 1.25%) in an effort to curb price increases by ‘cooling down’ the economy. But this risks dragging the UK into a recession, piling further misery on those struggling most.
Policy-makers are also facing pressure from workers and trade unions, which argue that without wage increases, people will continue to see their living standards decline. The current industrial action by the National Union of Rail, Maritime and Transport Workers (RMT) has been met with fierce criticism from the UK government, which has warned of a wage-price spiral (where an increase in wages causes further increases in prices and vice versa) if union demands are met. But RMT members are adamant that now is the time to support the workforce by increasing pay, easing the squeeze on living standards caused by rising prices.
Whatever the outcome of the strikes, it is unlikely that this debate will subside any time soon. As wage growth fails to keep up with price increases, and people feel the full force of higher energy bills in the autumn and winter, the cost of living crisis is set to dominate headlines for months to come.
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