The United Kingdom has been grappling with a significant rise in the cost of living, which has had a profound impact on households across the nation. The annual inflation rate, as measured by the Consumer Prices Index, skyrocketed to a staggering 11.1% in October 2022, marking a 41-year high. However, recent data indicates that the inflation rate has moderated, with April 2024 figures showing a 2.3% increase compared to the previous year.
The initial surge in inflation can be attributed to a combination of global factors. The Covid-19 pandemic and the associated lockdowns led to a strong global demand for consumer goods, which, coupled with supply chain disruptions, contributed to the inflationary pressure. Additionally, energy and fuel prices soared, particularly in the wake of Russia's full-scale invasion of Ukraine in February 2022. As a large net importer of goods, including energy, the UK was particularly vulnerable to these global price fluctuations.
While global factors were the primary drivers of high inflation, domestic factors have also played a significant role. The UK economy has witnessed strong pay growth, with labor costs constituting a substantial portion of expenses for many firms, especially in the services sector. This has further fueled inflationary pressures within the domestic economy.
Food prices have been a major contributor to the rising cost of living. From April 2022 to April 2024, food prices surged by an astonishing 22.5%, a level of increase that previously took nearly 12 years to achieve. Similarly, energy prices have been a significant driver of inflation, with household energy tariffs and road fuel costs increasing substantially in 2022. The government introduced the Energy Price Guarantee in October 2022 to cap typical consumption, but the EPG became less generous in July 2023, leading to further price increases for consumers.
To combat the rising inflation, the Bank of England has taken decisive action by increasing interest rates. From December 2021 to August 2023, the Bank raised interest rates at 14 consecutive policy meetings, taking them from 0.1% to 5.25%. While the Bank has since maintained the rates at 5.25%, economists and financial markets anticipate potential rate cuts by the end of 2024. However, the higher interest rates have already had a significant impact on households, particularly in the form of increased mortgage rates and rental prices.
The impact of high inflation on households has been substantial, with low-income households being the most affected. According to an Office for National Statistics survey from May 2024, 55% of adults in Great Britain reported an increase in their cost of living compared to the previous month. Food bank charities and debt advice charities have also reported a surge in demand, highlighting the financial strain faced by many households.
The government has implemented various policies to support households during this challenging period. In April 2024, benefits linked to inflation were uprated by 6.7%, while the basic State Pension and new State Pension saw an increase of 8.5%. The government has also extended the temporary 5p cut to fuel duties into 2024/25 and provided additional funding to the Household Support Fund. However, the level of support in 2024/25 is notably lower compared to the previous two financial years.
