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The cost of living has been increasing across the UK since early 2021 and in April 2022, inflation reached its highest recorded level, and the ONS estimates that it is now higher than at any time since around 1982, 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 9.0% higher in April 2022 than a year before.

Consumer prices, as measured by the Consumer Prices Index (CPI), were 9.0% higher in April 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. From April 2021 to April 2022, domestic gas prices increased by 95% and domestic electricity prices by 54%, due in part to a return of global gas demand as pandemic restrictions are lifted and lower than normal production of natural gas.

On 1 April 2022 the new price cap came into force. The regulator Ofgem announced the cap would increase from its current equivalent annual level of £1,277 per year to £1,971; a 54% increase.

As well as the military, political and humanitarian impact of Russia’s invasion of Ukraine, there are implications for the world economy. For the UK, the most likely economic effects of the conflict will be higher energy prices. After rising following the invasion, gas prices on international markets have fallen steadily, while oil prices have remained high.

As a result, road fuel prices in the UK have increased and energy bills may also rise further (for businesses, as well as households). Some commentators have suggested the household energy price cap could increase by 30-50% 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. These products have become more expensive 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 during 2022.

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

On 5 May, the Bank of England forecasted inflation to peak “at slightly over 10% in 2022 Q4, which would be the highest rate since 1982”.

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% 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%. Inflation reached 9.0% in April 2022, which indicates that inflation for Q2 2022 could surpass the OBR’s forecast. 

Taxes and benefits

Changes are being made to personal taxes in 2022/23. Earners on less than £25,000 now pay less in income tax and National Insurance Contributions (NICs). Those earning above £25,000 will pay more. Taken together, the changes will raise the Treasury around £14 billion in 2022/23, with higher income households paying the most.

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

According to the Office for National Statistics, 87% of adults in the UK reported an increase in their cost of living in April 2022.

The OBR expects household incomes after tax and 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 an extra 1.3 million people will fall into absolute poverty in 2023, including 500,000 children.

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