How is inflation affecting people in London?

London is a famously expensive city. But higher salaries, lower energy bills, and better public transport have led some to believe that people living in the capital may be resilient to rising prices. By analysing the latest prices micro data, it is clear that Londoners face a serious squeeze on their household finances.

Londoners are, at least partly, protected from inflation. Or so the common wisdom runs. The average Londoner is richer, has leaner energy bills, and enjoys living in a city with faster-growing output and jobs to help plug the gap. This means that despite Consumer Price Index (CPI) inflation in the UK being at multi-decade highs (above 10% year-on-year), Londoners are hurt less by this.

But averages hide the strain on London’s poorest, and the share of spending on energy bills is not the only issue that counts. Prices are changing variably between different parts of the country and this affects who feels the bite of inflation at what time. Taking detailed data from the Office for National Statistics (ONS), we can try to build a clearer picture of how inflation has played out in the capital. The latest numbers suggest that Londoners may have faced price hikes sooner than the rest of the UK, on average. And outside the relief from falling global energy prices, many shelf-front price pressures have not yet peaked. For people living in the capital, the worst may yet be to come.

Why would inflation differ across regions within the same country? One reason is that different spending patterns in different parts of the UK change the experience of inflation. On this measure, London looks less exposed to the cost of living crisis. Data from 2021 shows that households in the capital devoted the smallest share of their spending to energy bills (4.2%) out of any UK region, with Northern Ireland (nearly 7%) the highest. Londoners also drive less, meaning they were not as exposed to soaring prices for second hand cars and petrol in 2021. This is the narrative that led commentators like the Centre for Cities to conclude that those living in London and the South East were experiencing much lower inflation.

But spending patterns are not the only factor – prices themselves can differ between parts of the UK. It’s well-known that London is an expensive city. The ONS calculated that in 2016, London’s prices were around 7% above the UK average, even after excluding housing costs. Given that both median house prices and median rents in London are well over 80% above the average for England, the overall ‘cost of living premium’ in the capital will be much higher.

This is common for big cities across the world. Data from the United States, for example, shows that metropolitan areas tend to have higher prices than the national average. San Francisco was the most expensive area, with prices (including housing) nearly 20% above the US average in 2021.

International experiences can also help us understand why these differences arise. Population size and density, as well as wage levels, were the key drivers of price variation across areas according to a German study. London is certainly the most densely populated area of the UK, with 5,600 people per square kilometre, versus an average for England and Wales of just under 400. And its median earnings are over 20% higher than the UK average. London’s position as the most expensive UK region clearly fits this logic.

But ONS data from 2016 gives us few clues on the latest trends in the cost of living crisis. So, how can we measure recent changes in individual regions’ prices? Unlike the United States, which calculates inflation in major cities like New York, Los Angeles and Chicago, the UK has no official statistics for prices at a sub-national level. But every month, the ONS releases detailed data on individual quoted prices for around half the basket of goods and services that go into the CPI. This data comes from ONS-contracted price collectors physically visiting or phoning up businesses around the UK and recording their prices. Vitally for our work, these quotes are recorded by region. A cleaned and collated version of the dataset running back to 1988 is available as the 'Long-Run Price Database’ created by Richard Davies (Economics Observatory Director). For simplicity, we will refer to these figures as ‘shelf-front’ prices, even if many of the goods and services don’t come on shelves (childminder fees, for instance).

While useful, there are some limitations to this data. Most importantly, coverage is not even across all goods and services. The other half of the CPI basket, where data is collected centrally by ONS head office, contains some vital costs for households. Crucially, this includes energy bills – the single biggest driver of the current surge in inflation. But the data covers other areas well. Even after excluding some volatile entries, the shop-front dataset contains around 70% of food prices in the CPI and 80% of restaurant prices. So, while price quotes are not a complete picture, they give us an insight into a range of important areas.

Other limitations are more technical. By restricting our work to prices sold in London, our sample sizes become smaller, introducing more uncertainty into our findings. There are also some changes to the size or quantity of the items purchased that we cannot pick up properly; and products going on sale will also affect our results. Finally, regional price measurements can be affected by biases that arise from the variety of products in different areas. Past research on US scanner data found that correcting these biases undermines the common finding that smaller cities have lower prices than larger ones. Correcting these limitations could form the basis for future work.

With the shelf-front prices in hand, it is important to find a way to build a measure of inflation. [RD1] We trim out the top and bottom 10% of per item price growth rates (i.e., outlier datapoints), then find an average for the rest (weighted for shares in consumption). More detail on this method and how we build weights for London consumption is available in a GLA report from August 2022. The results are shown in the figure below:

Figure 1: Headline shelf-front inflation in London versus the UK

Source: ONS; Davies, 2023

The first thing that stands out from these results is that neither national nor London trends in shelf-front inflation have peaked yet. Shelf-front inflation in March hit 9.9% year-on-year in London (pink line), somewhat above the UK average of 9.6% (blue line). Both figures are still on an upward trend, unlike headline CPI inflation, which peaked in late 2022. Global fuel and energy prices are easing, which should bring down inflation this year. But outside those areas, a wide range of price pressures may take longer to slow down.

Another result that stands out is that London’s prices took off much faster than the rest of the UK at the outset of the cost of living crisis. In the six months from June to November 2021, the capital faced average shelf-front inflation of over 5%. Over the same period, the national figure was 2.5%. The last three months of data also show London prices pushing back above national trends. We should bear in mind that the shelf-front inflation measure leaves out energy bills. This means the wider UK’s inflation experience is likely higher than these figures suggest – actual CPI inflation (the turquoise line), at over 10%, is certainly higher. But while this makes it less clear whether London’s overall inflation is above national trends, the price pressures captured in this measure do seem to have taken off faster in the capital – and may peak higher.

Why did London’s inflation pick up sooner? One explanation could lie in its faster economic recovery from the pandemic. Experimental quarterly GDP figures from the ONS show London as the fastest-growing region in 2021. By the end of the year, it was experiencing annual economic growth of over 13% and output had recovered above pre-pandemic levels – just as the city’s shelf-front inflation was almost two percentage points higher than the national average. Faster-growing demand in London may well have seen the capital hit supply chain challenges harder and sooner, driving up inflation.

Yet even as economic output advanced, the evidence suggests a significant chunk of Londoners were falling behind in their personal finances. Throughout 2022, GLA-commissioned polling data from YouGov showed an average of around 8.4% of Londoners falling behind on bills (see appendix note for details). In contrast, national ONS polling data showed 4.4% of Brits fell behind on gas and electricity last year. The latest GLA polling in March 2023 shows one in five Londoners were struggling financially. These respondents were roughly three times likelier than the overall sample (29%, compared with 9%) to report that they were going without essentials such as food, and more than twice as likely (30%, compared with 12%) to be using more credit or going into debt to help them manage living costs. In terms of the future, in January 2023, nearly four in ten (36%) Londoners expected they would definitely or probably struggle to meet energy bills over the next six months.

So, despite an economic recovery, higher inflation is hitting the worst-off Londoners hard. And one area of inflation that acutely affects those on low incomes is food prices, as lower-income households tend to devote more of their spending to food compared to richer households. Food has been a key factor in high inflation over the last year, and prices were up nearly 20% year-on-year in March. To see how this has played out in London, we can extract the food prices from our shelf-front data.

Figure 2: Shelf-front food price inflation in London versus the UK

Shelf-front food inflation reached 14% in London, while the national trend was 13.7%. This is lower than the headline CPI figure, which is likely a result of our data trimming method. Here again, London saw an acceleration greater than the UK average at the start of the cost of living crisis. In the year from June 2021, London’s shelf-front food prices grew at an average pace around double the national average. Even when wider UK trends caught up, this will still have left many prices higher in London relative to the rest of the country.

For instance, one of the fastest areas of recent food inflation has been dairy products. The price of a two-pint bottle of semi-skimmed milk is now 67% higher in London than in March 2021, while on average across the UK, the same product is up 61% in price. For a kilogram block of cheddar, the figures are even more extreme: nearly 63% for London versus just over 37% for the UK. If lower-income households are more affected by food inflation, this evidence suggests those in London faced the squeeze sooner.

Figure 3: The change in cheese prices in London and the wider UK

Outside the home, food and drink prices have also been rising faster in London’s restaurants, pubs and bars compared with the rest of the UK. Dining out in the capital cost 13.7% more in March 2023 than a year earlier, compared with a UK average increase of 11.5%. And it is not just high-end eateries that are seeing prices soar. London’s ‘pint premium’ for a draft bitter in a pub has gone up over the last two years. While a London pint cost around 19% more than the UK average at the end of 2019, the latest figure now stands at just under 29%.

Figure 4: The change in price for a pint of bitter in London and the UK overall

Turning to other essential costs, a major current concern for UK policy-makers is childcare. Here, clear price trends are harder to unpick because of volatility, especially when we restrict the sample to London. But on an item-by-item basis, we can dig out some insights. For both nursery care and childminders, the difference between costs in London and the wider UK have narrowed in recent months. This suggests childcare may be one area where Londoners’ essential costs have peaked sooner. At the same time, childminder hours in London are still 52% higher than the national average, while for nursery fees the gap is 44%.

Figure 5: The gap between childcare costs in London versus the UK average

All these trends have implications for policy. Our finding that some essential costs in London may have risen faster and sooner makes the latest round of benefit uprating crucial for low-income households in the capital. More broadly, poorer Londoners may have faced the squeeze from rapid inflation eroding real incomes for longer. The fact that shelf-front inflation has not yet peaked at either the local or national level is a reminder of how important ongoing support is, as universal energy bill payments end this month. And with food costs an important part of the capital’s inflation trend, the Mayor of London’s recent decision to universally fund free school meals for all primary school children in the city could not be more timely.

At the same time, the limitations underlying some of our statistics also speak to the need for more investment in local data collection. Without local price trends for energy, housing, cars and public transport, and with sampling problems and biases over the long term, we can only construct a partial picture at present. The ONS is in the process of transforming price data with detailed scanner data underlying their methods – and changes like this are welcome. To properly serve the needs of our communities, we need high-quality evidence to build effective, deliverable solutions, and these findings are just the beginning.