Rising cost of living in the UK

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. Recent data shows the annual inflation rate was 3.2% in March 2024. High inflation affects the affordability of goods and services for households.

Inflation rate falling

UK consumer prices, as measured by the Consumer Prices Index (CPI), were 3.2% in March 2024 than a year before, down from 3.4% in February, and the lowest since September 2021.

The 3.2% outturn in March was a little higher than expected, with economists forecasting 3.1%.

“Core” inflation, which excludes the volatile energy and food components of the CPI, fell from 4.5% in February to 4.2% in March. Services inflation, seen as a measure of domestic inflationary pressure, fell from 6.1% in February to 6.0% in March. Both the core and services 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 3%, this means prices are still 3% higher compared with a year before.

Inflation data for April 2024 will be published by the Office for National Statistics on 22 May.

Inflation rate expected to continue to fall 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 April 2024 was for inflation to be 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. At its March policy meeting the Bank’s Monetary Policy Committee said it expects inflation to fall “slightly below the 2% target” in Q2 2024.The Bank’s February forecasts expect inflation 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 Spring Budget, the Office for Budget Responsibility (OBR) forecasts lower inflation than the Bank of England. The OBR forecasts inflation to decline to 2.0% in Q2 2024 and is then expected to remain below 2% until Q3 2027.

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 March 2024 with prices in March 2023.

This means that changes to prices that occurred more than a year ago, before March 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 and ongoing 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 4.0% higher in March 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 March 2022 to March 2024 food prices rose by 23.9%. It previously took over 12 years, from September 2009 to March 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 and early 2024. However, the speed of this period of disinflation has varied by country.

In March 2024, the UK’s annual inflation rate of 3.2% was a little higher than in France (2.4%), as well as the US (2.4%) and Germany (2.3%).

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, including in March, the Bank of England’s Monetary Policy Committee (MPC) left interest rates unchanged at 5.25%. The results of the next MPC meeting will be announced on 9 May 2024.

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 23 April 2024, were expecting two or three reductions in interest rates in 2024, taking rates from 5.25% down to 4.75% or 4.50%.

A mid-April survey of economists by Bloomberg, the financial news and data provider, found that most expected the first rate cut in June, with rates cut to 4.25% by year end.

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 March and April 2024, 56% of adults in Great Britain reported an increase in their cost of living compared to the previous month.

In March 2024 the OBR forecasted that real household disposable incomes per head will increase by 0.1% in 2024 and then by 1.7% in 2025.

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 March 2024 they helped 3,452 people with debt advice, after a record 48,533 in January 2024.

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 Government is providing less support for the cost of living in 2024/25, compared with 2023/24 and 2022/23.  A temporary 5p cut to fuel duties has been extended into 2024/25 and the planned increase of fuel duties in line with inflation has been cancelled. Fuel duties will therefore remain at the level they were reduced to in March 2022.

The Household Support Fund is receiving an extra £500 million so it can be extended until September 2024. The fund allows local authorities in England to make discretionary payments to people most in need to help with the rising cost of food, energy, and water bills.

In 2023/24 and 2022/22, the Government provided significant support through the energy price guarantee, cost of living payments, energy bill support scheme, council tax rebates and other policies.

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.

Personal taxes

Various changes have been made to income tax and National Insurance contributions (NICs) since 2021.

Thresholds in income tax have been frozen at their April 2021 levels so they aren’t increasing with inflation, which would be the usual approach. Freezing thresholds means that taxpayers will pay more income tax on their income, compared with a situation in which the thresholds rose with inflation.

For employees and the self-employed, NICs rates have been cut and thresholds increased. The latest changes have taken the main rate of employee NICs from 12% to 8% and the main rate of self-employed NICs from 9% to 6%. The threshold at which employers start paying NICs on employee earnings has been frozen.

The Institute for Fiscal Studies says, in 2024/25, excluding Scotland, employees earning between about £26,000 and £60,000 per year will be better off from all NICs and income tax changes since 2021. This is about half of employees – around 14 million people.

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