Rising prices will hit low income households hardest, and challenge the UK’s economic recovery.
Inflation was always going to be the buzz word for 2022. Over the past year, numerous factors have come together to push prices higher, both in the UK and across the world. Looking ahead, price pressures are set to intensify, resulting in a sharp squeeze in the cost of living, particularly for lower income households.
The escalation of the conflict in Ukraine will only push inflation higher, most immediately through increases in global commodity prices. The impact on the UK will be felt most acutely by an even deeper squeeze on household incomes. In turn, this will have wide-reaching implications for the pace of recovery from the pandemic, income and wealth inequality, and for economic policy.
Inflation is set to pick up further…
Latest data shows that CPI inflation (which covers the average price of a typical basket of goods and services purchased by the UK consumer) rose to 6.2% in February. This was the highest rate of inflation since 1992, and marked a substantial rise from the 0.4% rate just a year earlier.
In broad terms, numerous factors had come together to drive prices higher (we have explored these in more detail in an earlier note):
- Rising global commodity prices: particularly crude oil prices, which have been steadily increasing since June 2020
- In particular, recent pressure on global energy prices led Ofgem to raise their energy price cap substantially in October 2021, with another hefty increase announced for April.
- Global supply chain disruption leading to a knock-on impact for prices of some goods, such as second-hand cars
- A surge in demand upon COVID-19 restrictions being lifted
- In particular, the composition of spending during the pandemic shifted significantly, with consumers spending more on goods and less on services. This is adding further to price pressures, with
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