What do the latest UK inflation data mean for the cost of living crisis?

Current levels of inflation are the highest witnessed in three decades. Rising energy costs associated with housing and transport are the main forces driving up prices. Together with minimal wage growth, price increases are fuelling a cost of living crisis across the UK.

Prices in the UK are surging. The Consumer Price Index including owner occupiers’ housing costs (CPIH) – the most comprehensive measure of inflation – rose by 6.2% in the 12 months to March 2022, according to new data from the Office for National Statistics (ONS). This has increased from 5.5% in the 12 months to February 2022.

Figure 1: CPIH, CPI and OOH inflation rates (March 2012 to March 2022)

Source: ONS

Note: CPIH: Consumer Price Index including owner occupiers’ housing costs; CPI: Consumer Price Index; OOH: Owner occupiers’ housing costs

Soaring energy prices are the main cause of this increase. Rising gas, electricity and motor fuel prices mean that household services and transport are the main contributors to overall inflation in this period. Other products such as meat, vegetable oil and wheat are also getting more expensive. Contributions from six of the 12 categories used in the index were the largest they have been for over a decade.

Figure 2: Contributions to the 12-month CPIH rate (March 2020 to March 2022)

Panel A: CPIH rate, percentage point change

Panel B: Contributors, percentage point contribution

Source: ONS

How have changes to the Ofgem price cap affected fuel prices?

In October 2021, the Office of Gas and Electricity Markets (Ofgem) increased the cap on energy prices. This has contributed to rising inflation from gas and electricity bills. The price cap limits the price that energy suppliers can charge for about 15 million households in the UK. Raising the cap offers utility companies more room to pass on high fuel prices to consumers.

The change to the price cap in October 2021 was due to rising energy prices following complications caused by the Covid-19 pandemic. Demand for energy fell during periods of lockdown, leading to a decline in supply. As restrictions were then eased, demand jumped, placing upward pressure on prices.

Prices in wholesale energy markets have gone up again in 2022 as a result of the war in Ukraine. Russia supplies about 40% of Europe’s natural gas. And even though the UK imports less than 4% of its gas from Russia, the pressure for other world suppliers to increase production has undoubtedly caused fluctuations in gas prices in the UK.

The latest revision of the price cap this month will see the threshold increase by 54%. Ofgem itself has acknowledged that this will be ‘worrying for most people’. Like the increase in inflation seen after the October 2021 revision, policy-makers should expect to a see a similar pattern of rising inflation in the coming months.

What about transport?

Contributions from transport to the CPIH inflation rate have varied over the past two years. In the 12 months to March 2022, transport costs have contributed 1.47 percentage points – the largest amount since before the start of the National Statistic Series, first launched by the ONS in January 2006.

This has been driven in part by the rising price of motor fuel. In March 2022, average petrol prices were 160.2 pence per litre (ppl) – a significant increase from 123.7 ppl this time last year. Specifically, the inflation rate for motor fuels and lubricants was 30.7%, which is estimated to be the highest rate since January 1989.

Increasing second-hand car prices have also contributed – making up 0.36 percentage points for the 12-month inflation rate to March 2022. Rising prices in this market are thought to be driven by a global semiconductor shortage, which is affecting the production of new cars, leading to increased demand for used vehicles.

How have real wages been affected?

In real terms, growth in regular pay between November 2021 and January 2022 was -1% on the year. But total pay grew only 0.1%, implying that bonuses in some sectors have been a major factor in households’ pay growth.

But current inflation is eroding any growth in nominal wages. And because of the specific causes of inflation, many UK households may be facing a crisis. As gas and electricity bills are essential and cannot easily be substituted (demand for these services is ‘inelastic’, as economists say), many households are struggling financially. This has been reflected in slowing retail sales growth, and in reports of some lower-income households having to choose between ‘heating or eating’.

Many people are finding themselves living in ‘fuel poverty’, unable to access necessities without making substantial sacrifices elsewhere. And with inflation – and energy prices in particular – looking set to rise over the coming months, the cost of living crisis has only just begun.