Rising cost of living in the UK

The House of Commons Library has published its latest report on Rising cost of living in the UK.

It can be seen here, and says:

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 easing in subsequent months. It was 8.7% in May 2023. High inflation affects the affordability of goods and services for households.

Inflation not falling as fast as expected

Consumer prices, as measured by the Consumer Prices Index (CPI), were 8.7% higher in May 2023 than a year before, unchanged from April. Economists had expected a decline to 8.4%.

The inflation rate increased sharply during 2021 and 2022, peaking in October 2022 before falling somewhat in subsequent months. It was 8.7% in May

Measures of underlying inflation pressures unexpectedly rose in May 2023. “Core” inflation, which excludes the volatile energy and food components of the CPI, rose from 6.8% in April to 7.1% in May. Services inflation increased from 6.9% in April 7.4% in May. Both are at their highest rates since 1992.

The core and services inflation rates have been increasing in recent months, reaching their highest rates since 1992

Services prices are seen as being less exposed to global factors and more dependent on domestic costs. Inflation in services is also considered to be more persistent than inflation in goods.

Figures for inflation in June 2023 are scheduled to be published by ONS on 19 July.

Inflation rate expected to fall in 2023

The combination of statistical effects, falling energy prices, and other factors like easing global cost pressures, are forecast to reduce the UK’s annual inflation rate during 2023.

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 May 2023 with prices in May 2022.

This means that changes to prices that occurred more than a year ago, before May 2022 in this example, “drop out” of the annual inflation rate. Economists expect this effect to lead to the inflation rate generally falling during 2023, as some past price increases – like the sharp increases in energy  bills – “drop out” of the annual comparison.

Global supply pressures have subsided. For instance, supply bottlenecks have eased and wholesale gas prices have fallen on financial markets (though this takes time to pass through to bills for households and businesses).

The average forecast among economists surveyed by the Treasury in the first half of June 2023 was for inflation to be 4.7% in the final quarter of 2023, which is up from 3.9% in the May survey.

The Bank of England expects inflation to ease in 2023. In its latest set of forecasts published in early May 2023, it forecast an inflation rate of 5.1% in the final quarter of 2023, higher than its previous forecast of 3.9% made in February.

The Bank of England forecasts inflation to fall in 2023 and 2024, but by less than it did in its previous forecasts

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.

Consumer goods and energy prices pushed inflation higher

Increases in the costs of consumer goods, underpinned by strong demand from consumers and supply chain bottlenecks, were the major factors causing rising inflation in 2021 and 2022. Food prices have also been rising sharply over the past year and were 18.3% higher in May 2023 compared with a year before, a little below the 45-year high of 19.1% set in March 2023.

Energy prices and consumer goods were the main contributors to rising inflation in 2021 and 2022. The contribution of food has been increasing in 2023

Another important driver of inflation is energy prices, with household energy tariffs and road fuel costs increasing. 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 have 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. Prices have risen since then, but at a slower rate. From May 2022 to May 2023, domestic gas prices increased by 36% and domestic electricity prices by 17%.

On 8 September 2022 the then Prime Minister announced a new Energy Price Guarantee would be introduced on 1 October, to cap typical consumption at £2,500 a year. It was initially intended to last for two years, but the Chancellor announced on 17 October that it would only last sixth months. In the Autumn Statement 2022 he announced that the EPG would be increased in April 2023 to £3,000 for typical annual consumption and last to the end of March 2024. In the Spring Budget 2023 The Chancellor said that the increase to £3,000 would be put back from April to July 2023.

As well as the humanitarian, military and political impact of Russia’s invasion of Ukraine, affected the world economy. For the UK, a key economic effect of the conflict has been higher energy and food prices. After rising following the invasion, gas prices on international markets have fallen steadily, and oil prices (in US dollars) have been falling since June 2022.

As a result, road fuel prices and household energy bills in the UK increased in 2022. Energy bills for businesses also. Details of new Government support for businesses, the Energy Bill Relief Scheme, were announced on 21 September 2022. This was replaced from April 2023 by the Energy Bill Discount Scheme.

Russia and Ukraine are also large producers and exporters of agricultural products, such as wheat, and some metals. These products became more expensive on international markets, leading to increases in food and materials prices in the UK, although global commodity prices, beginning in the second half of 2022, have generally eased back.

Inflation around the world

Consumer price inflation rose in many countries during 2021 and 2022. Pandemic-related supply shortages were a major factor. As the global economy recovered from its pandemic-related recession, there was increased demand for products and materials. The conflict in Ukraine also led to higher commodity prices (mainly in the first half of 2022), pushing up inflation around the world.

Inflation rates seem to have peaked in many economies in late 2022, with a decline in the annual rate of inflation evident in 2023. In May 2023, the UK’s annual inflation rate of 8.7% was higher than in most comparable economies such as Italy (8.0%), Germany (6.3%), the Eurozone average (6.1%), France (6.0%) and the US (2.7%).

In May 2023, the UK’s annual inflation rate of 8.7% was higher than in most comparable economies, such as Italy, Germany, France and the US

Government policies for households

The Energy Price Guarantee (EPG) caps the unit of cost of energy for households. A household’s bill will continue to be influenced by how much energy they use, but a typical household could save around £1,500 between October 2022 and June 2023, according to the Government. Households will play less than the EPG during July to September 2023 as energy prices have fallen. 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 payments totalling £900
  • pensioner households who will receive a £300 payment
  • people on non-means-tested disability benefits who will receive a £150 payment

Support provided during 2022/23 included:

  • £400 off energy bills for all households
  • cost of living payments of varying size to different recipients. £650 for households receiving means-tested benefits. £300 for pensioner households and £150 for people receiving disability payments
  • a £150 council tax rebate for households in council tax band A to D
  • a 5p cut to fuel duty, which has been extended into 2023/24
  • a permanent increase to the amount someone can earn before National Insurance Contributions (NICs) are charged

On 23 June 2023, the Chancellor, the principal lenders and the Financial Conduct Authority agreed a range of support measures for people struggling with mortgage payments.

Impact on households

According to the Office for National Statistics, 62% of adults in Great Britain reported an increase in their cost of living in June 2023 compared to a month ago.

In March 2023, the OBR forecast real post-tax household income to fall by 4.3% in 2022/23, the biggest fall since comparable records began in 1956.

Food bank charities are reporting an increase in demand: the Trussell Trust reported that in the year to March 2023 they provided nearly 3 million emergency food parcels, a record number, more than during the pandemic and more than double the number in the same period five years before.

The Bank of England has been raising interest rates to try and get the inflation rate back to its 2% target. They have been raised from 0.1% in December 2021 to 5.0% as of late June 2023.

This has led to higher borrowing costs for households, notably on mortgage interest rates. The reaction on financial markets to the mini Budget of 23 September 2022 led mortgage providers to further increase interest rates on the mortgages they offer. Mortgage rates then declined until May 2023.

Higher-than-anticipated inflation data has resulted in expectations that the Bank of England will have to raise interest rates further. In turn, mortgage providers, faced higher funding costs on the wholesale market, have since the end of May 2023 raised interest rates on the mortgages they offer.

Data collected by Moneyfacts, a personal finance news service, show that the interest rate on average two-year and five-year fixed rate mortgages have risen by around 0.85 to 0.9 percentage points from the end of May to 26 June 2023 (when this briefing was published).

Overall, the Bank of England estimates that around half of mortgages held by owners who live in their properties (4 million) will be exposed to higher rates in 2023 (this includes those on variable rate mortgages as well as those whose fixed rates expire).

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