Social Justice

When will the cost of living crisis end and will prices in the UK ever go down?

What does the inflation rate mean for you? Will prices come down? Here's what you need to know about whether the cost of living crisis will ever end

Fresh groceries at a shop in London, UK, in February 2023. Photographer: Jose Sarmento Matos/Bloomberg

The cost of living crisis seems as though it has lasted an age. Although inflation has eased in recent months, people have faced prices rising at rates not seen in decades while their wages have not kept up. This has left them struggling with debt and sacrificing the essentials. So will the cost of living crisis end, and will prices ever come down?

Inflation remained at 4% in the year to January, the same as the month before. It comes at a bad time for UK families already feeling the effects of the cost of living crisis.

Even though inflation is much lower than it was a few months ago, that doesn’t mean prices are falling – in fact, they are still rising, just at a slightly slower rate. Food inflation remains stubbornly high, with costs up by 7% on the previous year. 

That is, however, the lowest food inflation rate seen since April 2022. It just doesn’t mean that food prices are falling.

Prices are still rising and you will likely feel the pinch. What does inflation mean for you? And will prices ever come down? We break down everything you need to know about whether the cost of living crisis is ever going to come to an end. 

What actually is inflation? And what does it mean for me?

The term “inflation” is the technical way of describing the rate at which prices are rising. But what does it actually mean and how does it impact your life? If you’ve noticed the cost of a bunch of bananas or a pack of loo rolls is still getting more expensive and your household bills keep on soaring, that’s because inflation has been high for, well, far too long at this point. The higher the inflation rate, the faster your bills increase.

The inflation rate of 4% in January 2023 means prices have risen by 4% on average in comparison to what they were in January 2022. Prices are still increasing and will continue to do so as long as inflation is in the positive figures.

If you want to see just how much more expensive your shopping basket is going to be as a result of inflation, you could use a price comparison website like Trolley. It has a grocery price index with data showing how much all your basic supermarket items have increased in recent months. 

Will prices in the UK ever come down?

The simple answer is that UK prices across the board will probably never come down – and almost certainly not by very much – but our wages are supposed to keep up with rising prices to make us less likely to feel the pinch. 

For prices in the UK to fall, inflation would need to go into negative figures, often called deflation. That is a rarity. The last time this happened was in 2015 when prices fell by a grand total of 0.1% because of a sudden drop in the price of oil. Before that was in 2009, during the global financial crisis, but economists disagree on the details as only one measure of prices was negative. You have to go back to 1960 to find another example of deflation.

But don’t panic. The cost of living crisis will come to an end eventually. Prices will stabilise and grow more slowly and real wages should catch up, with progress being made on this already. 

For the first time in two years, wage growth caught up with rising prices last summer. Pay, excluding bonuses, increased by an average of 7.8% in May to July compared with a year earlier. This matched the pace of inflation over the same period.

This was boosted by one-off payments to NHS workers and civil servants following pay deals to end strike action.

But average pay growth slowed to 5.8% in the three months up to December, down from 6.7% on the three months to November, according to the Office for National Statistics. That’s still over the rate of inflation, but not by a huge amount.

Another problem is that not every worker has received a pay rise to match inflation – it’s an average across the economy. And for the millions of families who have hit breaking point during the cost of living crisis, it will not feel like much of a boost to their bank balances. 

There are several reasons why many people might actually be worse off. There has been a rise in unemployment – companies were hit by high interest rates and more than 200,000 job cuts were made between May and July last year. 

People face debt which has built up as they have struggled to cover soaring costs. UK households have a record £22 billion in unpaid essential bills including utilities, council tax, plus benefit and tax credit overpayments.

Interest rates have also led to mortgage payments rising. And as a consequence of this, landlords have increased rents. Many people face higher costs for housing. 

And then there are food costs. Rising at 7% in the year up to January, that’s still over the rate of wage growth. 

When will the cost of living crisis end?

The cost of living crisis will be over once prices stabilise and wages have risen enough to match. With the record rise in wage growth last summer and inflation easing, the cost of living crisis “appears to be coming to an end”. But experts warn that the “real damage has already been done”.

The Office for Budget Responsibility warned of a drop in living standards of 3.5% by 2024/2025 compared to pre-pandemic levels. While this is half the peak-to-trough fall expected in March, it still represents the largest reduction in real living standards since ONS records began in the 1950s. 

Megan Davies from the Stop the Squeeze campaign said: “Today’s inflation figures confirm what we have been telling the government for months – the cost of living crisis is very far from being over.

“The government has favoured inadequate sticking plaster solutions over dealing with the structural causes of the crisis, like our broken energy market, crumbling social safety net, and unfair tax system where those with excess wealth do not pay their fair share.

“The budget is the last chance before the election for the government to show that they are listening to the public and put in place a real plan for an affordable Britain.”

The Bank of England predicted that inflation will be back to “normal levels” within the next few months, by which they mean around 2%, but then it will rise slightly. An inflation rate of 2% is the target the government has set. But it doesn’t mean the cost of those essentials will come down. They’ll keep on rising.

Dr George Dibb, associate director for economic policy at IPPR, said: “This announcement that inflation is still not falling is likely just a blip, with the rate expected to come down again over the next few months, but prices are still rising and it’s a salutary reminder of the continuing cost that many working people have paid.   

“We can expect the Bank of England to start lowering interest rates this year, but for many, wages still have some catching up to do. And the gap between benefit levels and a living income remains stratospheric. This is the wrong time for the government to talk about cutting taxes. Instead it should prioritise fixing public services in order to underpin the economic growth that is needed to ensure sustainably rising wages.”

According to the Resolution Foundation’s annual Living Standards Outlook for 2023, the cost of living crisis should ease in 2024. But it won’t fully be over until wages catch up for all households. 

Brace yourself: real wages compared to prices are not expected to return to 2021 levels until 2027. For the typical household, incomes are actually set to be below pre-pandemic levels in real terms even in 2027-2028. So we still have a long way to go. 

Wages grew at a record annual pace between May to July, matching inflation. But stronger wages mean concerns that price rises will take longer to ease, with the Bank of England likely to raise interest rates again. 

It’s also important to consider the people who are getting a pay rise: in July, those in the finance sector enjoyed average pay rises of 7.6% in real terms, while people working in education saw their pay go down by 2.6%, according to The Equality Trust

Public sector pay fell sharply in real terms between 2021 and 2023, according to the Resolution Foundation. In the three months to May 2023, average weekly pay was 9.2% below its real value two years ago – three times the fall experienced in the private sector. 

Will energy bills come down? 

People across the UK face higher energy bills from January 2024.

Average households will now pay £1,928 each year for their gas and electricity, because that’s the figure Ofgem has set for its energy price cap.

Every three months, the energy regulator reviews and updates the price cap to reflect changes in the cost of energy and inflation. It’s intended to ensure bills are fair.

But it doesn’t mean that your household bills can’t exceed £1,928 – some households will pay more and others less. It all depends on how much energy you use, as well as your circumstances like where you live and the energy efficiency of your property.

“The price cap does not protect those who simply cannot afford the cost of keeping warm,” said Adam Scorer, the chief executive of National Energy Action. “That requires direct government intervention through bill support, social tariffs and energy efficiency.”

The government’s energy rebate scheme, a discount on household energy bills, ended in March last year. This had been a lifeline to many people, helping them save around £66 each month.

Simon Francis, coordinator of the End Fuel Poverty Coalition commented: “These price hikes come at the worst possible time for households. Bills will go up just as winter bites hard and household finances are hit further by Christmas credit cards, the long January pay period and the ongoing wider cost of living crisis.

“We warned Ofgem that a January price cap rise was a bad idea when the regulator consulted on this in 2022. Now the chilling effect of the change is being realised, the inhumanity of this policy is clear to see. It will be anything but a happy new year for people trapped in Britain’s broken energy system.”

Will house prices come down?

House prices soared to record highs last year but rising interest rates and the cost of living crisis have sent prices falling in recent months. That trend looks set to continue in 2024.

However, that does not necessarily mean it’s all good news for people looking to get on the housing ladder. With deposits still out of reach for many first-time buyers and difficulties in securing a mortgage, homeownership is still a tricky proposition.

The average UK house price, measured against final transaction prices, was £288,000 in October 2023, the ONS found. That’s down 1.2% on prices recorded in October 2022.

The financial pressures facing households led to predictions of a house price crash not too long ago but the market has remained relatively resilient.

In fact, Halifax recorded a second straight month of house price rises in November 2023, up 0.5% or £1,394 on average to £283,615 on average. The revival comes as the Bank of England has opted to freeze mortgage rates after sustained hikes.

But the affordability gap is still seeing people who want to get on the housing ladder and buy a home left disappointed. Halifax’s average price is £40,000 higher than levels house-hunters would be looking to pay pre-pandemic.

Read more about whether house prices will go down here.

Are prices rising at the same rate for everyone?

Unfortunately not. Prices are rising even faster for poorer households. This is because the costs of essentials are soaring at higher rates, and low-income families typically spend a greater proportion of their income on these items. 

Food and non-alcoholic drink prices have risen by 8% in the year to December, down on the previous month but remaining stubbornly high. The Resolution Foundation has found that poorer families are most affected by surging food prices as they spend a far greater share of their family budgets on food (14%, compared to 9% for the highest-income households).

As a result, the effective inflation rate for the poorest tenth of households is around 2% higher than it is for the richest tenth of households.

Peter Matejic, chief analyst at the Joseph Rowntree Foundation, said: “Families on the lowest incomes won’t be debating what it means for inflation to remain at 4%. They’ll be debating whether to turn the heating on, or to replace their shoes that have holes in or to skip another meal because they can’t afford it.

“The government’s cost of living payments gave families a short-term reprieve. Without them, they face an income safety net that offers no safety and the ever-rising cost of essentials like food and energy.

“Politicians can start making a difference at the budget. Universal credit needs to reflect the actual cost of essentials. Beyond that, we need an economy that works for people, not one that leaves people exposed to unjustifiable hardship.”

The world’s five richest men have £688 billion of wealth between them. That’s boomed by £367bn in the last five years.

Meanwhile, the wealth of the poorest 60% – encompassing nearly five billion people – has fallen.

Income inequality will rise every year and could reach a record high of 40.8% by 2027-2028, according to the Resolution Foundation’s predictions. What does this mean exactly? The rich are getting richer, and the poor are getting poorer. 

Do you have a story to tell or opinions to share about this? We want to hear from you. Get in touch and tell us more.

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