UK households are facing a cost of living crisis with inflation at the highest rate for 30 years and a record increase in household energy bills expected from April 2022. Petrol and diesel prices are at an all time high, gas prices have soared in recent months, and national insurance contributions will rise for workers in April 2022.

Inflation

The annual Consumer Prices Index (CPI) was 5.5% in January 2022, up from 5.4% in December 2021. The Retail Prices Index (RPI) was 7.8% in the year to January, up from 7.7% in December. CPIH, which is the ONS’s preferred measure of inflation, was 4.9% in January 2022, up from 4.8% in December.

February’s inflation data will be published by the Office for National Statistics on 23rd March 2022.

The latest data from the Office for National Statistics shows some key essential items, including electricity (up by 19.2%), gas (up by 28.8%) oil and other fuels (up by 39.5%) and transport fares (up by 9.5%) rose significantly in the year to January 2022.

Table 1: Percentage annual change in RPI for the year to January 2022, selected items

Inflation forecasts

The table below provides an average of independent RPI and CPI inflation forecasts from a number of different financial and economic institutions. This data was gathered and published in December 2021. It shows that RPI is expected to peak at 6.4% in April 2022, before declining slowly throughout the rest of the year. Meanwhile, CPI is expected to peak at 5.0% in April 2022. More recently, the lifting of the energy price cap from April 2022 and the economic impact of the war in Ukraine has led economists to predict that CPI could in fact rise to almost 8% in April 2022.

The Resolution Foundation has reported that the conflict in Ukraine could push peak inflation in 2022-23 above 8 per cent. This could leave the typical real household income for non-pensioners 4 per cent – or £1,000 – lower than in 2021-22.

The Resolution Foundation also reported that rising food and energy prices risk driving a second inflation spike this autumn that could reach over ten per cent for poorer households – significantly higher than the peak for richer households.   This is because low income households spend a higher portion of their income on essentials like food and fuel which are rising at higher rates than non-essentials.

National Insurance rise

The government has announced a rise in National Insurance Contributions (NICs) of 1.25% for both employees and employers from April 2022. This rise has been dubbed as a Health and Social Care levy. This tax will fall disproportionately on the working-age population, with Resolution Foundation demonstrating that for a single adult, working full-time and earning the National Living Wage, the NI rise will cost around £2 a week, or just over £100 a year.   For someone earning £30,000 a year, the cost will be £252 a year, as shown below.

Housing costs

The price of housing remains one of the biggest issues facing employees and their families. In December 2021 the average house price in the UK was £275,000, which is 10.8% (£27,000) higher than the previous year.

Private rental prices paid by tenants in the UK rose by 2.0% in the 12 months to January 2022, up from 1.8% in December 2021. The median monthly rent was £755 for England, recorded between 1 October 2020 and 30 September 2021; this is the highest ever recorded.

Childcare costs

Childcare costs represent a key area of expenditure for many staff.  It is therefore worth noting that the annual Coram Family and Childcare (previously the Family & Childcare Trust) survey for 2021 found that Britain’s parents are paying 4% more for childcare for children under two, and 5% more for children aged two than they were the previous year.

Wider economy

In early February, the Bank of England raised interest rates to 0.5% stating that UK households must brace themselves for the biggest fall in their standard of living since records began three decades ago. Interest rates are expected to rise again to 0.75% on 17th March.The statutory ‘National Living Wage’ was extended to 23 and 24 year olds for the first time in April 2021. The ‘National Living Wage’ is to rise to £9.50 an hour from April 2022. This will represent a 6.6% rise from its current level.Finally, on the 15th November 2021, the Living Wage Foundation announced their new rates. The real living wage now stands at £9.90 an hour outside of London and £11.05 in London.