Almost two years have passed since the UK inflation rate peaked at 11.1% in October 2022 – its highest rate in 41 years. With the cost of living still increasing, will UK prices ever drop?
Consumers believed the price of supermarket goods, fuel, utility bills and other expenses would start to go down again once inflation was under control.
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This hasn’t been the case: despite the inflation rate having dropped to 2.2%, as of 14th August 2024, prices are still rising.
Unfortunately, the belief that prices will ever go back to pre-2022 rates is a myth. When inflation goes down, it doesn’t mean prices are going down too. On the contrary, they are still rising, but just more slowly.
For UK prices to dip across the board, inflation would need to be in negative figures. This is highly unlikely to happen.
Why is there a cost-of-living crisis?
To understand the current situation, we need to go back to the start of 2022, when consumers first experienced a significant rise in spending. The cost of necessary items, such as food and energy supplies, began to increase faster than the rise in household income. This left people short of money and unable to meet financial responsibilities.
Much of the world ground to a halt due to the spread of the Covid 19 virus. There was a higher than usual demand for consumer goods by people trapped at home. This disrupted supply chains and caused price increases.
Then, on 24th February 2022, when the conflict in Ukraine began with the Russian invasion, this caused fuel and energy prices to rise globally due to output from both nations being reduced and subsequent sanctions on Russia.
Other factors that impacted the UK crisis included a higher demand for already depleted gas and oil reserves and the end of the government’s financial support package given to individuals and businesses during the pandemic.
Analysts have also cited Brexit as a contributory factor, as it has changed the way Britain trades with other nations still in the EU.
Higher fuel duties and VAT, increased rents and greater wage demands in the post-Covid climate have also worsened the economic crisis. Although it has impacted nations all over the world, it has been particularly damaging for people on low incomes in Britain.
Cost-of-living crisis facts
While the government initially responded by issuing crisis payments to people on certain benefits, subsidising gas and electricity suppliers and providing tax rebates in some circumstances, the emergency aid has now ended, and people are feeling the full effects of the economy.
Ongoing energy price increases are leaving poorer families choosing between food and heating. A report published in The Mirror newspaper revealed 5.3 million UK residents had made a choice whether to buy food or heat their homes.
Increasing fuel prices have left 33% of Brits struggling to fill up their car for the daily commute to work. A study by Volkswagen revealed 63% of 18 to 24-year-olds wouldn’t be able to afford to drive to work if fuel prices continued to increase.
Postage stamps increase price
Businesses are facing further expense due to an increase in the cost of postage, with Royal Mail increasing the price of stamps by 10p each.
A first-class stamp went up to £1.35 and second-class stamps to 85p on 2nd April 2024. This was the fourth price hike in two years, which Royal Mail blamed on rising costs such as wage increases and less consumers using their services.
Would deflation help to lower prices?
Deflation in the UK last happened in April 2015, when a sudden decrease in the price of oil caused inflation to drop into negative figures. This led to cheaper air and sea travel, which brought inflation down further.
The Consumer Price Index had reduced by 0.1% since 2014, leading to a drop in food prices of up to 3%. This was the first time since 1960 that Britain had experienced deflation.
Some economists suggested temporary deflation could have a positive effect on the economy, keeping interest rates lower and increasing consumer spending power.
However, others say it shows underlying weaknesses in the economy, producing a negative impact, with the relatively small reduction in food prices not compensating for the adverse effects of deflation.
Will the cost-of-living crisis ever end?
Even though UK price inflation has dropped over the past two years, most people say they aren’t feeling any benefits.
According to the official definition, the cost-of-living crisis won’t end until prices stabilise, and salaries have risen to match or exceed inflation.
Office for National Statistics data suggests annual earnings have risen by 6% between April and June 2024 compared with wages in 2023. However, taking into account inflation, actual pay growth is only 2.3%.
In theory, householders should be feeling a little better off. However, most consumers have weathered a significant reduction in living standards, including the biggest drop in the year 2022 to 2023 since records began 70 years earlier.
While the Office for Budget Responsibility suggests living standards should improve by 1% per year on average, 90% of UK residents say the cost-of-living crisis is continuing for them, according to a poll by Stop the Squeeze, which warns the real damage has been done and will take many years to repair – if ever.
Following a period of double-digit inflation from September 2022 to March 2023, when prices across the board rocketed, the truth is they are never going to reduce again to what they were two years ago.
While inflation fell to 2% in May 2024, hitting the target set by the Bank of England for the first time since July 2021, it has also crept up again since July to its current level of 2.2%. Food prices are still rising faster than inflation and energy costs have remained high due to the record prices of wholesale energy, which have been passed on to customers.
Research by the Joseph Rowntree Foundation suggests 2.3 million UK households have taken out loans to pay rent and energy bills. A massive 92% of borrowers have gone without at least one essential item, such as reducing food shopping, while 53% are going without three staple items, including heating.
