In numbers: what is fuelling Britain’s cost of living crisis?

As UK households face increasingly squeezed budgets, six charts show the scale of the challenge

The government is under mounting pressure to tackle Britain’s worsening cost of living crisis, with inflation at the highest rate for 30 years and a record increase in household energy bills expected from April.

Here are six charts highlighting the scale of the challenge as the squeeze hits the poorest households hardest.

Inflation has soared since the economy reopened

Inflation as measured by the official consumer prices index (CPI) jumped to 5.4% in December, the highest rate since March 1992. However, the Bank of England has said the official gauge for the annual increase in living costs is expected to rise further still, with a peak close to 6% expected by April. Some economists have warned that inflation could rise further and remain higher for longer than expected.

The increase reflects a snapback in demand for goods and services after lockdown, when prices fell sharply, as well as the impact from supply chain disruption due to Covid-19 hitting factory production and global trade.

Advanced economies around the world are dealing with similar problems, though the UK has added disruption from Brexit. Most economists expect inflation to ease as Covid disruption abates, although there are warnings of persistently higher rates than in the past.

And it’s hitting all areas of daily life

Prices are rising at similar rates for richer and poorer households, according to official figures. However, household income levels influence personal experiences of inflation – an issue raised by the food and poverty campaigner Jack Monroe.

Poorer households find it harder to cope with similar rates of inflation to richer families as essentials, such as energy and food, form a larger proportion of their shopping basket than discretionary items. According to the Resolution Foundation, on average the lowest-income families spend twice as much proportionately on food and housing bills as the richest.

“The decisions people have to make are made harder,” said Dave Innes, head of economics at the Joseph Rowntree Foundation poverty charity. “If you’re already spending mainly on essentials, where are you going to cut back if prices are going up?”

Petrol and diesel prices are high

UK petrol and diesel prices have hit their highest levels on record in recent months, hitting motorists and adding to business costs, driven by a sharp rise in global oil prices after lockdown. Having plunged from about $60 a barrel in February 2020 to about $20 just two months later in the early stages of the pandemic – and with some prices for US oil dropping below zero – the price of Brent crude has since risen to the highest in seven years at almost $90 a barrel.

The government has frozen fuel duty for 11 years, saving the average car driver a cumulative £1,600. However, critics say the policy has added to carbon emissions, while more could have been done to invest in greener electric vehicles.

And gas prices have soared in recent months

Gas prices on the wholesale market have soared to record highs in recent months, fuelled by soaring demand after lockdown, cold weather draining reserves and lower levels of wind over the summer affecting renewable energy production.

The surge has triggered an energy crisis across several major nations and led to almost 30 smaller UK household suppliers of gas and electricity going bust in recent months. Consumers have been relatively insulated so far by the government’s energy-price cap, although that will change dramatically in April after Ofgem, the industry regulator, recalculates the limit to reflect wholesale market prices.

Households are expected to see their gas and electricity bills go up by about 50% from April, an increase worth about £600 for an average annual utility bill, taking the total cost to almost £2,000 a year before any measures from the government to reduce the impact. It comes after a previous record jump when the cap was last altered in October, when prices went up by about £139 for those on default tariffs.

Tax rises and energy price increases will squeeze budgets

Britain’s poorest households are expected to be hit hardest by the increase in energy bills as they spend proportionately more of their income on energy. According to the Resolution Foundation, the poorest will see their energy spend rise from 8.5% to 12% of their total household budget – three times the proportion for the richest.

While households across the board will be hit, the Joseph Rowntree Foundation estimates the situation is worse for particular families. It estimates that low-income single-adult households could be forced to spend 54% of their income on gas and electricity.

It comes as the government prepares to increase national insurance contributions for workers in the same month, leading to calls from some Tories to scrap the tax raid to ease the pressure on living costs. While experts say there are fairer ways to increase taxes than through national insurance, the plan is relatively progressive and they warn that scrapping it would be a badly targeted way of helping the poorest households with their energy bills.

At the same time, wages are stagnating

High rates of inflation are eroding the spending power of workers’ pay packets, with economists warning that average weekly earnings after tax will fall in real terms in 2022. According to official figures, inflation-adjusted pay fell in November and has sunk below the pre-financial crisis peak for wages recorded in 2008. Ministers argue that the lowest-paid will see an inflation-busting 6.6% rise in the national living wage to £9.50 an hour from April.

However, average pay is expected to shrink this year. The Institute for Fiscal Studies expects the average worker will be almost £13,000 a year worse off by the middle of the 2020s than under a scenario whereby wages continued to rise at pre-2008 financial crisis trend rates. Real pay had been rising steadily for decades prior to the banking crash, although it has now fallen on three occasions in the last decade alone.

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