Rising cost of living in the UK

Note: This briefing will no longer be updated. It provides an overview of the period of high inflation between the end of 2021 and mid-2024. Latest inflation data and forecasts are available in the Library statistical briefing on Inflation. The Library breifing High cost of living: Impact on households provides up to date information on how households are dealing with the ongoing effects of high prices. You can find other briefings and data on the Library’s webpage on the Cost of living and inflation.

The cost of living increased sharply across the UK during 2021 and 2022, affecting the affordability of goods and services bought by households. The annual rate of inflation peaked at 11.1% in October 2022, a 41-year high, before subsequently easing over the subsequent 18 months.

In May 2024, inflation fell to 2.0%, the Bank of England’s target for the first time since July 2021.

This briefing gives an overview of developments in inflation, including for food, energy and fuel prices, as well as reviewing how rising interest rates led to mortgages becoming more expensive. It also summarises government support measures and looks at the effects of high inflation on different types of households.

Inflation rate from 2021 to 2024

The UK inflation rate, as measured by the Consumer Prices Index, rose almost continuously from under 1% in early 2021 to 11.1% in October 2022.

The inflation rate then declined, dropping to 2.0% in May 2024 (the most recent figure available at the time of publication).

The inflation rate is typical shown as the change in the price level over a 12-month period. For example, prices were 2.0% higher in May 2024 compared with May 2023.

We can also look at the change in prices over a longer time period to gauge the overall impact of the period of high inflation. Over the three-year period between May 2021 and May 2024, UK consumer prices increased by 20.8% in total.

Why did inflation rise so much?

The increase in inflation seen in 2021 and 2022 was mainly due to international factors. These included:

• strong global demand for consumer goods – a consequence of the Covid-19 pandemic and associated lockdowns;
• related supply chain disruption; and
• soaring energy and fuel prices – particularly, but not exclusively, due to Russia’s full-scale invasion of Ukraine in February 2022.

The combination of strong demand from consumers for goods and higher costs for businesses, partly reflecting supply chain bottlenecks, were reflected in higher prices for goods. As the UK is a large net importer of goods (including energy), these global factors affected consumer prices in the UK.

While global factors were the original drivers of high inflation, price rises in many areas of the domestic economy also accelerated in 2022 and early 2023. Measures of underlying inflation peaked during mid-2023, before easing.

This was partly due to strong pay growth, with labour costs making up a large share of costs for many firms, particularly in the services sectors.

The annual rate of so-called “core inflation”, which excludes the volatile energy and food components of the CPI, peaked at 7.1% in May 2023, its highest rate since 1992. Services inflation also hit a 31-year high of 7.4% in spring/summer 2023.

The Bank of England pays close attention to services prices when setting interest rates, as they are seen as less exposed to global factors and more dependent on domestic costs. Inflation in services is also considered to be more persistent than inflation in goods.

Core inflation was 3.5% in May 2024, the lowest it has been since October 2021. Services inflation did not fall as quickly and was 5.7% in May 2024.

Inflationary pressures from food and energy easing

Food prices rose sharply during 2022 and 2023, as global supply chain disruptions and the effects of Russia’s full-scale invasion of Ukraine lifted the input costs of food producers. These pressures eased during the second half of 2023 and first half of 2024.

UK food and non-alcoholic drink prices were 1.7% higher in May 2024 compared with a year before, based on the CPI measure of inflation. This continued the decline from the peak of 19.1% in March 2023, which was the highest rate of increase in food prices since 1977.

Over the three years between May 2021 and May 2024 food prices rose by 30.6%. It previously took over 13 years, from January 2008 to May 2021, for average food prices to rise by the same amount.

Another important driver of high inflation has been energy prices, with household energy tariffs and road fuel costs increasing in 2022. 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 followed a similar trend. The largest jump in prices was in April 2022 and this annual increase has now ‘dropped out’ of the inflation figures.

On 8 September 2022 the then Prime Minister announced a new Energy Price Guarantee (EPG) would be introduced on 1 October, to cap typical consumption at £2,500 a year. This limited increases in typical bills to 27% in October 2022.

The EPG became less generous in July 2023, increasing to £3,000 a year. However, a fall in the price cap in July 2023 meant that the EPG no longer set maximum prices and consumer bills fell. The price cap fell again in October 2023, April 2024 and July 2024. The July to September 2024 price cap will still be almost 30% higher than the winter 2021/22 cap.

Oil prices spiked after Russia’s 2022 invasion of Ukraine. They fell for much of the second half of 2022 and the first half of 2023. Prices in July 2024 are similar to those from the start of 2022. UK road fuel prices peaked at new record levels in July 2022. They fell for much of the following year and have been similar to January 2022 prices in late 2023 and first half of 2024.

International comparisons of inflation

Consumer price inflation rose in much of the world during 2021 and 2022, peaking in many economies in late 2022, with a decline in the annual rate of inflation evident in 2023 and the first half of 2024. However, the speed of this period of disinflation has varied by country.

In May 2024, the UK’s annual inflation rate of 2.0% was in line or below many comparable economies, such as the US (2.0%), France (2.6%) and Germany (2.8%).

We can also compare changes in prices over a longer time period than the typical 12-month period shown by inflation rates. From January 2021 to May 2024, UK consumer prices increased by 22.8% in total, compared with 20.9% in Germany, 18.8% in the US and 16.6% in France.

Interest rates, mortgages and rents have risen

The Bank of England increased interest rates to try and get the inflation rate back to its 2% target. Interest rates were raised at 14 consecutive policy meetings from 0.1% in December 2021 to 5.25% in August 2023.

At its subsequent meetings up to June 2024 (the most recent at the time of publication) the Bank of England’s Monetary Policy Committee (MPC) left interest rates unchanged at 5.25%.

Given the reduction in the inflation rate, economists and financial markets are focused on when the Bank of England may start to cut rates. Financial markets, as of 9 July 2024, were expecting two reductions in interest rates by the end of 2024, taking rates from 5.25% down to 4.75%.

High interest rates led to higher borrowing costs for households, notably mortgage interest rates which rose sharply from the very low rates seen previously. Rental price growth rose continuously from late 2021 and reached a high of 9.2% for the year ending March 2024.

Impact of high inflation on households

From November 2021 to June 2024, British adults reported seeing an increase in their cost of living compared with the month before. This peaked in August 2022, when 91% of adults in Great Britain reported a higher cost of living than the previous month.

Throughout the period, adults mostly noticed an increase in the price of their food shopping, as well as fuel and energy bills and rent and mortgage costs. People responded to a higher cost of living by spending less on non-essentials, shopping around more and using less energy in their homes.

Low income households were most affected by rising prices. ONS data shows that households with the lowest incomes experience a higher than average inflation rate, while the highest-income households experienced lower than average inflation. This disparity is due to low income households being more affected by high food and energy prices.

Food bank charities and debt advice charities reported an increase in demand over the period of high inflation: the Trussell Trust reported that between April 2023 and March 2024 they provided 3.12 million emergency food parcels, a record high. Citizens Advice helped 8,213 people with debt advice in January 2022, 9,458 in January 2023 and 11,070 in January 2024.

UK Government policies for households

In April 2024, Department for Work and Pensions benefits that are linked to inflation were uprated by 6.7% (in line with the annual CPI inflation rate in September 2023), as were inflation-linked tax credits elements and benefits administered by HM Revenue and Customs. For 2024/25 the basic State Pension and new State Pension was increased by 8.5% in line with average earnings growth.

The government is providing less support for the cost of living in 2024/25, compared with the previous two financial years. A temporary 5p cut to fuel duties was extended into 2024/25 and the planned increase of fuel duties in line with inflation has been cancelled. As of July 2024, fuel duties therefore remained at the level they were reduced to in March 2022.

The Household Support Fund received an extra £500 million so it could be extended until September 2024. The fund allows local authorities in England to make discretionary payments to people most in need to help with the rising cost of food, energy, and water bills.

In 2022/23 and 2023/24, the UK Government provided significant support through the energy price guarantee, cost of living payments, energy bill support scheme, council tax rebates and other policies.

In June 2023, the Chancellor, the principal lenders and the Financial Conduct Authority agreed a range of support measures for people struggling with mortgage payments.

Personal taxes

Various changes were been made to income tax and National Insurance contributions (NICs) from 2021 to 2024.

As of July 2024, thresholds in income tax have been frozen at their April 2021 levels so they aren’t increasing with inflation, which would be the usual approach. Freezing thresholds means that taxpayers will pay more income tax on their income, compared with a situation in which the thresholds rose in line with inflation.

For employees and the self-employed, NICs rates have been cut and thresholds increased. Changes in 2023 and 2024 took the main rate of employee NICs from 12% to 8% and the main rate of self-employed NICs from 9% to 6%, as of April 2024. The threshold at which employers start paying NICs on employee earnings was frozen.

The Institute for Fiscal Studies says, in 2024/25, excluding Scotland, employees earning between about £26,000 and £60,000 per year will be better off from all NICs and income tax changes since 2021. This is about half of employees – around 14 million people.