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The cost of living has been increasing across the UK since early 2021. In May 2022, the annual rate of inflation was the highest it has been since 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 9.1% higher in May 2022 than a year before.

UK inflation rate and inflation forecasts

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 May 2021 to May 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, a key economic effect of the conflict is 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). The chief Executive of Ofgem said on 24 May that he expected the price cap to increase to around £2,800 in October 2022, an increase of around 40%.

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 international markets, leading to increases in food and materials prices in the UK.

Rising inflation around the world

Consumer price inflation has been rising in many countries since 2021. Pandemic-related supply shortages are a main factor. As the global economy recovers from its recession, there has been increased demand for products – especially consumer goods – and materials. More recently, the conflict in Ukraine is leading to higher commodity prices, which is also pushing up inflation around the world.

In May 2022, the UK’s annual inflation rate of 9.1% was higher than in some comparable economies such as France (5.8%), Germany (8.7%) and the Eurozone average (8.1%).

International comparison of consumer price inflation May 2022

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”. The Bank forecast inflation to remain above 9% up to and including Q1 2023, before easing to 3.6% by end-2023 and then below its 2% target during 2024. In an updated mid-June forecast, the Bank said it expected CPI inflation to rise to slightly above 11% in October.

In 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. 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 9.1% in May 2022, which indicates that inflation for Q2 2022 will almost certainly surpass the OBR’s forecast.

Government policies

Measures to support households were announced by the Chancellor in February, March and May 2022. The support, estimated at £37 billion, includes:

  • £400 off energy bills for all households
  • £650 payments for households receiving means-tested benefits with additional payments of £300 for pensioners and £150 for people receiving disability payments
  • a £150 council tax rebate for households in council tax band A-D
  • a 5p cut to fuel duty
  • an increase in the threshold at which NICs begins to be charged on earnings

In April 2022, the Government also brought in tax rises, for both income tax and National Insurance contributions (NICs). Once these changes are included, the net level of government support is worth around £14 billion in 2022/23.

Impact on households

According to the Office for National Statistics, 88% of adults in the Great Britain reported an increase in their cost of living in May 2022.

In its March 2022 forecasts, the OBR expected household incomes after tax and adjusted for inflation to start falling in Q2 2022 and to 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. Overall, recent Government support for households benefits low income households the most. The Resolution Foundation estimate that the measures announced to support households this year will “in effect offset 82 per cent of the rise in households’ energy costs in 2022-23, rising to over 90 per cent for poorer households”. 

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