Financial Indicators: Data from FTSE100, as well as oil prices and gold prices.
Documents to download
Rising cost of living in the UK (1 MB , PDF)
The cost of living increased sharply across the UK during 2021 and 2022. The annual rate of inflation reached 11.1% in October 2022, a 41-year high, before subsequently easing. High inflation affects the affordability of goods and services for households.
Recent data shows the annual inflation rate was 4.0% in January 2024, unchanged from December.
Inflation rate falling
UK consumer prices, as measured by the Consumer Prices Index (CPI), were 4.0% higher in January 2024 than a year before, unchanged from December.
“Core” inflation, which excludes the volatile energy and food components of the CPI, at 5.1% in January remained unchanged from December. Services inflation, seen as a measure of domestic inflationary pressure, rose slightly from 6.4% in December to 6.5% in January. Both measures were at 31-year highs in spring 2023.
A slowing or falling inflation rate means that prices are rising more slowly than before; it does not mean that price levels are actually falling. For example, if the annual inflation rate drops from 10% to 5%, this means prices are still 5% higher compared with a year before.
Inflation data for February 2024 will be published by the Office for National Statistics on 20 March.
Inflation rate expected to fall more gradually in 2024
The UK’s annual inflation rate is expected to continue falling in 2024, though more gradually than in 2023, due to lower energy prices and reduced inflation in consumer goods and food.
The average forecast among economists surveyed by the Treasury in the first half of January 2024 was for inflation to average 2.2% in the fourth quarter (Q4) of 2024.
In its latest set of forecasts published in early February 2024, the Bank of England expects inflation to continue to drop to 2.0% on average in Q2 2024. However, inflation is then forecast to rise again, reaching 2.8% in Q1 2025, due to persistent domestic inflationary pressures, before gradually falling to its 2% target in Q4 2026.
In forecasts published alongside the Autumn Statement, the Office for Budget Responsibility (OBR) expects inflation to average 2.8% in Q4 2024. The next set of OBR forecasts will be published on 6 March, alongside the Budget.
Some forecasters are expecting the inflation rate to fall even quicker than this, falling below 2% during the first half of 2024.
The inflation rate is typically expressed as the percentage change in consumer prices compared with one year before. For example, the most recent data compares prices in January 2024 with prices in January 2023.
This means that changes to prices that occurred more than a year ago, before January 2023 in this example, “drop out” of the annual inflation rate. This effect led to the inflation rate falling during 2023, as some past price increases – notably the steep hikes in energy bills in 2022 – “drop out” of the annual comparison, a process expected to continue to a lesser degree in early 2024.
Global and domestic causes of high inflation
The initial phase of this increase in inflation was mainly due to international factors. These included:
- strong global demand for consumer goods – a consequence of the Covid-19 pandemic and associated lockdowns
- related supply chain disruption
- soaring energy and fuel prices – particularly, but not exclusively, due to Russia’s full-scale invasion of Ukraine in February 2022.
As the UK is a large net importer of goods (including energy), these global factors affected consumer prices in the UK.
While global factors were the original drivers of high inflation, price rises in many areas of the domestic economy have also accelerated. This is partly due to strong pay growth, with labour costs making up a large share of costs for many firms, particularly in the services sectors.
Houthi rebel attacks on shipping in Red Sea
Recent disruption to shipping traffic in the Red Sea and Suez Canal, caused by Houthi rebels in Yemen, has resulted in higher shipping costs and many ships being diverted to the lengthier and costlier routes around the south of Africa. This could potentially raise input costs for some products being imported to the UK.
The consensus view, however, seems to be that the impact is still very uncertain and dependent on future events in the Red Sea and Middle East more widely. Any inflationary effects may also take some time to filter through to prices faced by consumers.
Inflationary pressures from food and energy easing
Food prices rose sharply during 2022 and 2023, as global supply chain disruptions and the effects of Russia’s full-scale invasion of Ukraine lifted the input costs of food producers. These pressures eased during the second half of 2023 and in early 2024.
UK food and non-alcoholic drink prices were 6.9% higher in January 2024 compared with the previous year, based on the CPI measure of inflation. This continued the decline from the recent peak of 19.1% in March 2023, which was the highest rate of increase in food prices since 1977.
Over the two years from January 2022 to January 2024 food prices rose by 24.8%. It previously took over 13 years, from October 2008 to January 2022, for average food prices to rise by the same amount.
Another important driver of high inflation has been energy prices, with household energy tariffs and road fuel costs increasing in 2022. Gas prices increased to record levels after Russia launched its full-scale invasion of Ukraine and continued to rise during much of 2022 due to cuts in Russian supply. Electricity prices are linked to gas prices and followed a similar trend. The largest jump in prices was in April 2022 and this annual increase has now ‘dropped out’ of the inflation figures.
On 8 September 2022 the then Prime Minister announced a new Energy Price Guarantee (EPG) would be introduced on 1 October, to cap typical consumption at £2,500 a year. This limited increases in typical bills to 27% in October 2022.
The EPG became less generous in July 2023, increasing to £3,000 a year. However, a fall in the price cap in July 2023 meant that the EPG no longer set maximum prices and consumer bills fell. The price cap fell again in October 2023.
Oil prices spiked after Russia’s 2022 invasion of Ukraine. They fell for much of the second half of 2022 and the first half of 2023. UK road fuel prices peaked at new record levels in July 2022. They fell for much of the following year before starting to increase again in late summer 2023.
International comparisons of inflation
Consumer price inflation rose in much of the world during 2021 and 2022, peaking in many economies in late 2022, with a decline in the annual rate of inflation evident in 2023. However, the speed of this period of disinflation has varied by country.
In January 2024, the UK’s annual inflation rate of 4.0% was higher than in France (3.4%), Germany (3.1%) and the Eurozone average (2.8%). A comparable measure of inflation for the US was 2.5% in December 2023.
Interest rates, mortgages and rents have risen
The Bank of England increased interest rates to try and get the inflation rate back to its 2% target. Interest rates were raised at 14 consecutive policy meetings from 0.1% in December 2021 to 5.25% in August 2023.
At its subsequent meetings the Bank of England’s Monetary Policy Committee (MPC) left interest rates unchanged at 5.25%.
Given the weak outlook for economic growth, economists and financial markets have turned their attention to when the Bank of England may start to cut rates. Financial markets, as of 16 February, were expecting three reductions in interest rates in 2024, taking rates from 5.25% down to 4.50%.
High rates have led to higher borrowing costs for households, notably mortgage interest rates which rose sharply from the very low rates seen previously. Around 1.6 million households whose fixed rate mortgages end in 2024 face higher mortgage costs. Rental price growth has also been rising in recent years.
Impact of high inflation on households
According to an Office for National Statistics (ONS) survey from January and February 2024, 46% of adults in Great Britain reported an increase in their cost of living compared to the previous month.
In November 2023 the OBR forecasted that real household disposable incomes per head will increase by 0.3% in 2023, fall by 1.5% in 2024, and then increase by an average of 1.5% between 2025 and 2028.
Low-income households are most affected by rising prices. ONS data shows that households with the lowest incomes experience a higher than average inflation rate, while the highest-income households experienced lower than average inflation. This disparity is due to low income households being more affected by high food and energy prices.
Food bank charities are reporting an increase in demand: the Trussell Trust reported that between April and September 2023 they provided 1.5 million emergency food parcels, a record high for this period, and a 16% increase from the same period in 2022. Citizens Advice reported that in January 2024 they helped a record 48,533 people with debt advice, compared to 43,977 in January 2023.
Government policies for households
From April 2024, Department for Work and Pensions benefits that are linked to inflation will be uprated by 6.7% (in line with the annual CPI inflation rate in September 2023), as were inflation-linked tax credits elements and benefits administered by HM Revenue and Customs. For 2024/25 the basic State Pension and new State Pension will be increased by 8.5% in line with average earnings growth.
The Energy Price Guarantee (EPG) caps the unit of cost of energy for households. A household’s bill is still influenced by how much energy they use, but a typical household may have saved around £1,500 between October 2022 and June 2023, according to the government. As energy prices have fallen, households will pay less than the EPG unit cost during July to March 2024.
The EPG is estimated to cost around £27 billion across 2022/23 (£23 billion) and 2023/24 (£4 billion).
During 2023/24, the government is also providing cost of living payments of varying size to different recipients. Those eligible include:
- households on means tested benefits who will receive 3 payments totalling £900
- pensioner households who will receive a £300 payment
- people on non-means-tested disability benefits who will receive a £150 payment
In January 2024, the main rate of employee National Insurance Contributions (NICs) was reduced from 12% to 10%.
More extensive and wider support was provided to households in 2022/23.
In June 2023, the Chancellor, the principal lenders and the Financial Conduct Authority agreed a range of support measures for people struggling with mortgage payments.
Documents to download
Rising cost of living in the UK (1 MB , PDF)
Information on business and consumer confidence surveys. This is generally released ahead of official statistical data and can indicate changes to the economic outlook.
This note lists a series of key documents on taxation.