The UK saw a sharp increase in the cost of living in 2021 and 2022, with the annual inflation rate reaching an 11.1% high in October 2022. This 41-year high dropped slightly to 10.1% in January 2023, and remains at that level in March 2023. The circumstances which propelled this are extraordinary, so how do the recent increases compare with the increase in the cost of living over time in the UK?

Reasons for the UK's cost of living increase

A number of reasons have propelled the increase in the cost of living in the UK. Among them are consumer goods cost increases, strong consumer demand, and supply chain bottlenecks. Domestic gas prices soared by 129% and domestic electricity prices by 67% between January 2022 and January 2023, mostly due to Russia’s war against Ukraine and the cuts in Russian supply which followed.

In addition, Ukraine and Russia are significant producers and exporters of wheat and other agricultural products as well as various metals. These products have also seen sharp price increases in international markets, despite an easing of global commodity prices recently. This has contributed to the rising cost of living in the UK. 

Cost of living over time in the UK

Rising cost of living in the UK impacts households

The Office for National Statistics reported that 94% of adults in Britain said their cost of living increased in January and February 2023. According to the Office for Budget Responsibility, the rising cost of living in the UK will continue to impact households. The OBR expects household income after tax to fall by 4.3% in 2022 and 2023, which is the biggest decrease since comparable recordkeeping began in 1956.

The House of Commons Library revealed that low-income households spend a larger proportion of their income than average on food and energy, which means they are more affected by price increases. This has led to increased demand on food bank charities such as the Trussell Trust, which reported that they provided a third more emergency food parcels in April through September 2022 than they did in the same period in 2021 and 50% more than before the Covid pandemic.

In a bid to try and lower the inflation rate below a 2% target, the Bank of England has raised interest rates. This interest rate hike resulted in higher borrowing costs for households, especially in mortgage interest rates. The financial markets’ reactions to the September mini budget prompted mortgage providers to further increase interest rates. Even though mortgage rates have decreased over the last few months, they are still higher than their mid-2022 levels.

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