The UK cost of living crisis deepened in April 2022, when the Office for National Statistics (ONS) found inflation had hit a 40-year high of 9%.
Energy prices, fuel costs and food bills have all risen dramatically, but wages have failed to keep pace.
On Monday (23 May), the Joseph Rowntree Foundation revealed families with children were battling price rises of £400 a month, while state benefits had dropped to their lowest level since 1982.
The situation has led to calls for Boris Johnson’s government to do more to help struggling households, with Rishi Sunak set to make an announcement on Thursday (26 May).
So, with UK household budgets facing their biggest squeeze in more than a generation, when can we expect the cost of living to decrease?
NationalWorld has looked at what the UK’s economists and think tanks believe could happen.
What is the UK cost of living?
The UK cost of living is the amount it costs to purchase everyday goods and services, such as food, heating and a tank of petrol.
The best measurement for where the cost of living sits is inflation, which is calculated in the UK through the ONS’s Consumer Prices Index (CPI).
This index shows us how much a typical basket of daily goods and services cost compared to the previous month and the same month in the previous year.
It’s weighted so that key items like bread have more influence on the overall CPI than more luxury purchases, like smartwatches.
What the most recently CPI showed us was that inflation hit 9% in April 2022 - a 2% rise month-on-month.
This means the cost of living rose 9% on average compared to what it was in April 2021.
Energy prices were the biggest single factor in pushing up the cost of living, after Ofgem increased the energy price cap by 54% in April because of record wholesale costs.
Gas prices have been at such a high level for UK suppliers because of:
- Increased demand from economies restarting after Covid lockdowns
- Low supply - partly caused by Russia withholding energy, as well as poor output from renewables in 2021
- Russia’s war in Ukraine
Will the cost of living go down?
While it’s inevitable inflation will have to go down at some point, the big question is when this will happen.
The latest assessment of the situation from the Bank of England is that things will get worse before they get better.
It has predicted inflation could peak at 10% by the end of 2022, before declining throughout 2023 and hitting the Bank of England target of 2% in 2024.
The public body is able to make a qualified estimate of where inflation will go because the levers it has at its disposal can have a direct impact on it.
For example, it raised interest rates in May 2022 - a move that typically lowers inflation as it reduces economic activity by making borrowing money more expensive.
However, it’s also worth noting the Bank of England doesn’t always get things right, as its prediction from February 2022 that inflation would peak at 7% demonstrates.
The organisation says it changed its view on what the peak of inflation would be because of the Russian invasion of Ukraine and its knock on impact on energy and food prices.
It says the war would be likely to drive up the Ofgem energy price cap well above its current level - which is already 58% above what it was this time last year.
Indeed, the Bank’s estimate in May 2022 that energy prices would jump another 40% look to be close to the mark after the head of Ofgem, Jonathan Brearley, revealed the price cap could rise to around £2,800 - 42% higher than the latest market cap.
Ultimately, the extent to which the price cap rises will have a major bearing on when we pass the peak of the cost of living crisis.
What do economists think will happen with cost of living?
When the Bank of England first announced the estimated 10% peak inflation figure in May, the Joseph Rowntree Foundation said it would cause “shock and fear”.
However, Threadneedle Street’s prediction isn’t the gloomiest out there.
The National Institute of Economic and Social Research (NIESR)’s central forecast is that inflation will peak at 9.1% in July 2022 - but would stay close to that level until January 2023.
Worse still, under its ‘sanctions’ estimates - i.e. how high inflation would go if widespread sanctions on Russian oil and gas were introduced - inflation would rise to 10.9% by January 2023.
Both of these predictions would see inflation remain above 5% until April 2023 at least.
Fellow think tank the Institute for Fiscal Studies (IFS) has not given a headline forecast of where inflation could go, but has broken down how it may peak for different economic groups.
It says inflation could peak at 14% for the poorest tenth of households by October 2022, compared to 8% for the most well off, unless the government intervenes.
This would be because poorer households spend a larger proportion of their incomes on energy (11%, the IFS estimates) than the richest (4%).
Other think tanks have not given a forecast of exactly where inflation could go.
But the Institute for Economic Affairs (IEA) said a lack of “strong and decisive” action from the Bank of England has damaged market confidence and could mean “inflation persists for longer”.
It also warned a lack of cost of living action now could lead to a recession that “would be even worse for the public finances”.
While it seems there is no sign yet of the cost of living crisis disappearing, there have been calls for the government to ease it for the poorest households by providing more financial support.
Speaking on Wednesday (25 May), Department for Environment, Food and Rural Affairs (DEFRA) Secretary George Eustice suggested the government would not commit to too much public spending as it could make the situation worse.
“We are treading a very difficult path here because if we just borrow lots more money and throw it at the situation we could compound inflation, we could make the situation worse and see prices rise further,” he told LBC.
NIESR said any benefits uplift - a measure many economists believe would be most effective - would not make inflation worse.
It said the Office for Budget Responsibility (OBR)’s forecast of £10 billion of ‘fiscal headroom’ and the likelihood that a benefits rise would affect only 5% of households, meant cost of living measures would have no major impact on inflation.