Rising cost of living in the UK

This briefing gives an overview of rising prices, particularly food, energy and fuel prices, including the potential impact of the conflict in Ukraine. It outlines Government support for the rising cost of living as well as how rising prices, interest rates and other policies which will impact household budgets.

Source > Research Briefing (UK Parliament)

Published Thursday, 14 April 2022

The cost of living has been increasing across the UK since early 2021 and in March 2022, inflation reached its highest recorded level since 1992, affecting the affordability of goods and services for households.

Consumer goods and energy prices pushing inflation higher

Consumer prices, as measured by the Consumer Prices Index (CPI), were 7.0% higher in March 2022 than a year before.

Increases in the costs of consumer goods, underpinned by strong demand from consumers and supply chain bottlenecks, have been one factor behind rising inflation.

Another important driver of inflation is energy prices, with household energy tariffs increasing and petrol costs going up. In the year to March 2022, domestic gas prices increased by 28% and domestic electricity prices by 19%, due in part to a return of global gas demand as pandemic restrictions are lifted and lower than normal production of natural gas.

On 3 February, the regulator Ofgem announced that the domestic energy price cap would increase from its current equivalent annual level of £1,277 per year to £1,971 in April; a 54% increase.

As well as the military, political and humanitarian impact of Russia’s invasion of Ukraine, there will also be implications for the world economy. For the UK, the most likely economic effects will come through higher energy prices. After rising strongly after the invasion, oil and gas prices on international markets have since fallen back somewhat. As of mid-April, they remain above pre-invasion levels.

As a result, petrol prices in the UK have increased and energy bills may also rise (for businesses, as well as households). Some commentators have suggested that the household energy price cap could increase by 40-50% when it is next revised in October 2022, although there is a great deal of uncertainty given the volatility in oil and gas prices.

Russia and Ukraine are also large producers and exporters of agricultural products, such as wheat, and some metals. Prices for these products have risen on financial markets, potentially leading to future increases in food and materials prices in the UK.

Inflation forecasts raised after invasion of Ukraine

In early February 2022, the Bank of England was forecasting the CPI inflation rate to peak at 7.25% in April 2022. The inflation rate had been expected to ease somewhat over the course of 2022.

Since the Russian invasion of Ukraine, economic forecasters have raised their expectations for consumer price inflation, not just in the near term but also that it will be higher for longer.

On 17 March, the Bank of England’s Monetary Policy Committee said that inflation would rise to “around 8% in 2022 Q2, and perhaps even higher later this year”, 1 percentage point higher in Q2 than in their official February forecasts.

In its latest forecasts, published 23 March 2022, the Office for Budget Responsibility (OBR) forecast CPI inflation to peak at 8.7% in Q4 2022 and be above 7% in each quarter from Q2 2022 to Q1 2023. This is much higher than the peak of 4.4% that was forecast in October 2021. For the fiscal year 2022/23, the OBR forecast CPI inflation to average 8.0%, more than double its previous forecast of 3.7%.

Taxes and benefits

Changes are being made to personal taxes in 2022/23. Earners on less than £25,000 will pay less in personal taxes (income tax and NICs) following the changes. Those earning above £25,000 will pay more. Taken together, the changes will raise the Treasury around £14 billion in 2022/23, with much of the cost concentrated towards the top of the income distribution. Taxes are being increased by a 1.25%-point rise in National Insurance contributions (NICs) rates and freezes to thresholds in income tax. The threshold at which NICs begins to be charged on earnings is increasing in July, which lowers the tax paid.

Benefits increased in April 2022 by less than the current level – or expected level – of inflation, which will put pressure on households relying on these payments.

Government support

The Chancellor announced Government support in relation to rising energy prices on 3 February 2022, including a £200 energy bills discount (repayable over five years) and a £150 council tax rebate. Further support was offered in the Spring Statement on 23 March, including a 5p cut to fuel duty and – as mentioned above – an increase in the threshold at which NICs begins to be charged on earnings.

Impact on households

83% of adults in the UK reported an increase in their cost of living in March 2022.

The Office for Budget Responsibility expects household post-tax incomes adjusted for inflation to start falling in Q2 2022 and not recover until Q3 2024.

Low-income households spend a larger proportion than average on energy and food so will be more affected by price increases. The Resolution Foundation estimates that an extra 1.3 million people will fall into absolute poverty in 2023, including 500,000 children.

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