The ‘cost of living crisis’ refers to the fall in ‘real’ disposable incomes (that is, adjusted for inflation and after taxes and benefits) that the UK has experienced since late 2021.

The government has responded to the crisis with several packages of support throughout this and last year, in 2022/23 household income support totalled £59.8bn and it is forecast to spend a further £21.5bn for 2023/24.1

The latest updates on support were announced in the Spring Budget, including an extension of the Energy Price Guarantee (EPG), however, the recent fall in the energy price cap means this support will now end.

Despite extensive government support, household incomes are not keeping up with living costs and are not expected to return to 2021 levels in real terms until 2027.

How high is inflation?

Inflation is calculated as the average change in the price of typical goods and services purchased by UK households over 12 months.

This is tracked using the Consumer Price Index (CPI), calculated by the Office for National Statistics using a sample of 180,000 prices of 700 common consumer goods and services.

The latest data has the current CPI at 8.7 per cent in the 12 months to April 2023. The Bank of England aims to keep the CPI rate of inflation at 2 per cent plus or minus 1 per cent (i.e. between 1 per cent and 3 per cent) and adjusts interest rates to achieve this.

How is inflation expected to change in the coming months?

Since inflation peaked at 11.1 per cent in October 2022 the rate has been gradually coming down, although it spiked up a little in February.

The latest forecasts from the Bank of England and the Office for Budget Responsibility both expect inflation to fall sharply this year, but the latest forecast from the Bank implies it will not return to the 2 per cent target until 2024. Additionally both forecasts project an over-correction that leaves inflation below 1 per cent until 2026.

Which prices are increasing fastest?

A rapid increase in energy costs, caused by a rise in the wholesale price of gas, has been a key driver in the increases in the price level since February 2022. Housing and household services (which include electricity and gas) as well as food and non-alcoholic beverages, made the largest annual contribution to CPIH inflation in April.


Had the government not intervened with the Energy Price Guarantee, capping the unit cost of electricity and gas, an average household’s energy bill would have increased to over £4,000.

Energy prices have been more expensive than in previous years. For example, based on typical consumption levels, the average annual gas bill in 2022 was £1,100, nearly double 2021 costs of £600.4

Energy prices have begun to fall with wholesale prices being their lowest since Spring last year.

Price cap

This is reflected in Ofgem’s latest price cap which has been set to an annual level of £2,074 for an average household. This is now below the EPG’s £2,500 cap which will end on July 1.

Price increases have become increasingly broad based over the course of this and last year.

On the lower end items such as second had cars and plumbing services increased by 1 per cent between April 2022 and 2023 while items such as whole milk and pasta have increased by over 26 per cent.