The Office for National Statistics has shown that inflation hit a 40-year high of 9% in April 2022, with prices rising due to Covid-19, the Russia-Ukraine war and Brexit
On Monday (23 May) the Joseph Rowntree Foundation revealed that families with children have been grappling with price hikes of £400 a month while state benefits have fallen to their lowest level since 1982.
When can we expect the cost of living to fall given the biggest strain on UK household budgets in more than a generation?
NationalWorld has examined what the UK economists and think tanks believe is possible.
What is the cost of living in the UK?
The UK cost of living is the cost of buying basic necessities such as groceries, heating and a tank of petrol.
This index tells us how much a typical shopping cart of daily goods and services costs compared to the previous month and the same month last year.
It’s weighted so that key items like bread have a bigger impact on overall CPI than luxury purchases like smartwatches.
This means that the cost of living has risen by an average of 9% compared to April 2021.
Gas prices have been at such high levels for UK suppliers for the following reasons:
- Increased demand from economies getting back on track after Covid lockdown
- Low supply – partly caused by energy withholding in Russia as well as poor renewable energy performance in 2021
- Russia’s War in Ukraine
Will the cost of living go down?
While inflation is bound to come down at some point, the big question is when that will happen.
It forecasts that inflation could peak at 10% by the end of 2022, before declining over the course of 2023 and reaching the Bank of England’s 2% target in 2024.
The public sector can assess the development of inflation in a qualified manner, since the levers available to it can have a direct impact on it.
However, it’s also worth noting that the Bank of England doesn’t always get it right, as shown by its February 2022 forecast that inflation would peak at 7%.
The organization says it has changed its mind about the peak in inflation due to the Russian invasion of Ukraine and its impact on energy and food prices.
Word is that the war would likely push Ofgem’s energy price cap well above its current level – which is already 58% above the level of this time last year.
Ultimately, the extent of the price cap hike will have a major impact on when we pass the peak of the cost-of-living crisis.
What do economists think will happen to the cost of living?
When the Bank of England first announced peak inflation estimates at 10% in May, the Joseph Rowntree Foundation said it would cause “shock and fear”.
Threadneedle Street’s prediction isn’t the bleakest out there, however.
Worse, according to its “sanctions” estimates – ie how high inflation would rise if sweeping sanctions were imposed on Russian oil and gas – inflation would rise to 10.9% by January 2023.
In both forecasts, inflation would remain above 5% at least until April 2023.
Another think tank, the Institute for Fiscal Studies (IFS), hasn’t made a headline forecast of where inflation might be going, but has broken down how it might peak for different economic groups.
This is because poorer households spend a larger proportion of their income on energy (11%, IFS estimates) than the richest (4%).
Other think tanks have not provided a forecast of exactly where inflation might be headed.
However, the Institute for Economic Affairs (IEA) said a lack of “strong and decisive” action by the Bank of England has damaged market confidence and could mean “inflation will last longer”.
It also warned that a lack of action on the cost of living could now result in a recession that “would be even worse for public finances”.
While there seems to be no sign yet that the cost of living crisis is going away, the government has been urged to ease it for the poorest households by providing more financial support.
In a speech on Wednesday 25 May, Minister for Environment, Food and Rural Affairs (DEFRA) George Eustice suggested the government would not commit to heavy public spending as it could make the situation worse.
“We’re walking a very difficult path here because if we just borrow a lot more money and throw it at the situation, we could make inflation worse, we could make the situation worse and see prices keep going up,” he told LBC.
The Office for Budget Responsibility (OBR) forecast of £10bn in “fiscal space” and the likelihood that a benefit increase would affect just 5% of households meant that cost-of-living measures would not have a major impact on inflation .
https://www.nationalworld.com/lifestyle/money/will-cost-of-living-go-down-how-uk-inflation-rates-predicted-energy-fuel-prices-3709171 Will the cost of living in the UK go down?