The House of Commons Library has published a paper on the Rising Cost of Living.
The cost of living has been rising since early 2021, but in December 2021 inflation reached its highest recorded level in decades, affecting the ability of households to afford goods and services.
Inflation forecast to reach 7%
Consumer prices, as measured by the Consumer Prices Index (CPI), were 5.4% higher in December 2021 than a year before. In early February, the Bank of England forecast the CPI inflation rate to peak at 7¼% in April 2022. Other private forecasters are also expecting inflation to hit around 7%.
In mid-December, the Bank of England forecast the CPI inflation rate to remain around 5% over the winter before rising to 6% in April 2022. Other private forecasters are also expecting inflation to peak around 6% or even higher in April.
A particularly important driver of inflation is energy prices, with household energy tariffs increasing and petrol costs going up. Between January and November 2021 domestic gas prices increased by 28% and domestic electricity prices by 19%.
On 3 February the regulator Ofgem announced that the cap would increase from its current equivalent annual level of £1,277 per year to £1,971; a 54% increase.
Food and non-alcoholic drink prices were up by 4.2% in the year to December 2021 on the official CPI measure of inflation. They may rise further in the coming months.
Tax and benefit changes
As well as likely higher inflation, household budgets may be squeezed by changes in taxes and benefits in the coming months. This includes an increase in National Insurance Contributions from April 2022, and changes to income tax, as well as the withdrawal of the £20 Universal Credit uplift. Stagnant wages may also affect household incomes.
Low income households
Low income households spend a larger proportion than average on energy and food, and will therefore be relatively more affected by increases in prices.