What does inflation hitting a 30-year high mean for UK households?

People’s standard of living is falling in the UK and the situation is worse than many had predicted. Goods and services are getting more expensive at a faster pace than people’s earnings are going up, on average. That is the unwelcome reality behind the latest numbers on inflation and jobs.

The government’s preferred measure of changes in living costs – the consumer prices index (CPI) – rose to 5.4 per cent, its fastest annual rate in three decades.

Of course, people do not experience the world through aggregate numbers and abstract concepts like inflation. The headline number hides 67 million different, and very real, personal experiences.

Energy prices account for much of the rise in the inflation rate while food prices are also on the up, which means people on the lowest incomes will be hit hardest.

A stark report on poverty from the Joseph Rowntree Foundation (JRF) this week laid out just how unequal the impact may be.

The JRF estimates that, from April, households on low incomes will be spending on average 18 per cent of their income after housing costs on energy bills.

For the poorest single-adult households, the proportion jumps to a staggering 54 per cent. Middle-income families, who also have more savings to draw on, will spend a more modest 6 to 8 per cent of income on energy.

Covid-19 has also played an important driver of higher living costs by wreaking havoc on the supply of goods. While supplies have been constrained, demand for goods has jumped as people spend some of the money they saved during lockdowns.

These effects should subside but there is worse to come before things improve. Prices that producers are paying for parts and raw materials are still rising fast. Much of those increases will eventually be passed on to customers.

UK households also face a 50 per cent jump in energy bills in April with a further rise expected in October. Wholesale gas prices are forecast to remain well above pre-pandemic levels for most of this year and next.

That will push up the main rate of inflation higher, perhaps beyond 7 per cent. Typically, the Bank of England would then step in to raise interest rates, hoping that higher borrowing costs will reduce the pace of price increases by making people less likely to spend money and reducing demand for goods and services.

It may help to bring down the headline rate of inflation but it would cut into some household budgets further, such as those on mortgages that track central bank interest rates.

There has rightly been much focus on the approaching cost-of-living “crisis” this year as energy bills and taxes rise. The shock to living standards is expected to be greater than any for decades. But, keeping attention on what is hopefully a short, sharp shock means the bigger picture is sometimes lost.

The latest reduction in real wages brings them down to below a peak reached in 2008. The more important story is not one of a single temporary crisis but a prolonged stagnation, worse than any seen in the UK for 200 years.

This country is not alone. Other European countries that have pursued the politics of austerity have faced similar fates.

It is a historic failure of democratic governments to deliver one of the most important things their citizens expect: rising living standards. Yet, what is on offer from the chancellor, Rishi Sunak, so far? Big tax increases for ordinary workers.

It’s clear new ideas are required.