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The cost of living has been increasing across the UK since early 2021. The annual rate of inflation reached 11.1% in October 2022, a 41-year high, 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 11.1% higher in October 2022 than a year before.

Consumer prices, as measured by the Consumer Prices Index (CPI), were 11.1% higher in October 2022 than a year before.

Increases in the costs of consumer goods, underpinned by strong demand from consumers and supply chain bottlenecks, have been factors causing rising inflation. Food prices have also been rising sharply over the past year.

Another important driver of inflation is energy prices, with household energy tariffs and petrol costs increasing. From October 2021 to October 2022, domestic gas prices increased by 129% and domestic electricity prices by 66%. 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.

On 8 September 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.

As well as the humanitarian, military and political 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, and oil prices (in US dollars) have been falling since June.

As a result, road fuel prices and household energy bills in the UK have increased. Energy bills for businesses have also increased and are expected to continue to rise. Details of new Government support for businesses, the Energy Bill Relief Scheme, were announced on 21 September.

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. The conflict in Ukraine is also leading to higher commodity prices, pushing up inflation around the world.

In October 2022, the Eurostat reported the UK’s annual inflation rate of 11.1% was higher than in some comparable economies such as France (7.1%) but similar to the Eurozone average (10.6%) and Germany (11.6%).

Inflation rate expected to slow in 2023

The Government’s Energy Price Guarantee (EPG) package caps the unit price of household energy, which means the inflation rate is likely to be lower than it would have been under Ofgem’s household energy price cap (which was due to be higher than the EPG).

The Office for Budget Responsibility (OBR) estimates that without the EPG inflation would have peaked at 13.6% in early 2023, 2.5 percentage points higher than its forecast with the EPG.

In forecasts published 17 November 2022, the OBR expects CPI inflation to peak at 11.1% in Q4 2022. This is similar to the Bank of England’s forecast of a peak of 10.9% on average in Q4 2022.

Both the OBR and Bank of England expect the annual inflation rate to ease in 2023, as the steep rises in energy prices seen in 2022 fall out of the annual comparison. The OBR expects inflation to slow to 3.8% by Q4 2023, while the Bank forecasts a rate of 5.2% for the same period, partly due to the expectation that domestic inflationary pressures “remain strong”.

Government policies

The Government announced the Energy Price Guarantee (EPG) on 8 September, which will cap the unit of cost of energy. A household’s bill will continue to be influenced by how much energy they use, but a typical household will save £900 this winter, according to the Government.

The EPG might cost the Government around £25 billion in 2022/23, while a similar scheme for non-domestic users of energy (businesses, charities, public sector, etc) might cost a further £18 billion. 

Other Government support announced during 2022 includes:

  • £400 off energy bills for all households
  • £650 payments for households receiving means-tested benefits. Pensioners will get an additional £300 and people receiving disability payments an additional £150
  • a £150 council tax rebate for households in council tax band A to D
  • a 5p cut to fuel duty
  • an increase to the amount someone can earn before National Insurance Contributions (NICs) are charged

Impact on households

According to the Office for National Statistics, 91% of adults in Great Britain reported an increase in their cost of living in October-November 2022.

The OBR expects real post-tax household income to fall by 4.3% in 2022-23, the biggest fall since comparable records began in 1956.

Low-income households spend a larger proportion than average on energy and food, so are more affected by price increases. Food bank charities are reporting an increase in demand:  the Trussell Trust reported that in April-September 2022 they provided almost 1.3 million emergency food parcels, a third more than in the same period in 2021 and 50% more than pre-pandemic levels.

The Bank of England has been raising interest rates to try and lower the inflation rate below its 2% target. 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 has led mortgage providers to further increase interest rates on the mortgages they offer. 

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