Inflation has surged to 9 per cent – the highest in 40 years. Prices are rising faster than wages, on average, meaning that people’s living standards will fall this year.
Average wages excluding bonuses rose 4.2 per cent in the three months to the end of March.
Around nine in 10 (87 per cent) of adults in Britain have reported their cost of living increased in March alone.
What is causing the cost of living to rise?
Energy prices have been a key driver of inflation as oil and gas supplies have been stretched while demand rises as the world emerges from the pandemic.
Rising energy costs have caused household bills to surge , squeezing households and pushing up the overall inflation rate.
Russia’s invasion of Ukraine has pushed up prices further because Russia is Europe’s largest supplier of gas and one of the world’s biggest exporters of oil.
Sanctions imposed on Russia have added to supply problems. This came after widespread disruption to shipping of goods caused by the pandemic.
Petrol and diesel prices in the UK surged to a new record this week.
Statistics from data firm Experian Catalist show the average cost of a litre of petrol was 167.6p per litre while diesel reached an average of 180.9p.
Compared to a year ago, when petrol averaged 128.38p a litre and diesel 130.80p, the cost of filling the typical 55-litre has risen from £70.61 to £92.20 for petrol and from £71.94 to £99.48 for diesel.
How much have energy prices increased?
The energy price cap, which sets the maximum rate most people pay for their domestic electric and gas rose 12 per cent in October last year and 54 per cent in April this year.
A household using an average amount of energy will now pay £1,971 for their dual fuel bill according to Ofgem’s calculations. That’s £693 per year more than last year. People on pre-payment meters will pay an average of £2,070.
Prices are on course to rise again when Ofgem changes its price cap in October this year, with experts forecasting the average bill will hit £2,600 a year.
The government has offered a £150 council tax rebate for people in houses that are bands A to D. The discount will be applied to direct debits from April. Households not on direct debit should speak to their local authority.
A £200 reduction on energy bills is due to be applied from October. Then government measure has been criticised because it is not targeted at those in greatest need and it is to be paid back through a levy on bills for the next five years.
If you are struggling to afford your energy bill you should speak to your supplier to ask for help. Citizens Advice may also be able to assist.
What else is increasing in price?
A surge in energy prices increases the cost of a whole range of goods, by pushing up the cost of production and transport.
Most concerningly, the cost of food is also going up sharply. The latest official data shows food prices rose 5.9 per cent in the past year with further increases expected in the coming months.
Again, the war in Ukraine has had a big impact. Russia and Ukraine are leading suppliers of key commodities, particularly wheat and sunflower oil. That’s caused an increase in the price of margarines and a range of other processed foods.
A big drop-off in supplies has prompted some countries to protect their home markets, which could further impact prices. This week, India banned exports of wheat. Indonesia, a key producer of palm oil, recently blocked exports of the product.
The price of second-hand cars has jumped 27 per cent in the past year, due to disruption to supplies of key parts for new cars such as microchips.
How long will the cost of living squeeze last?
The Bank of England expects inflation to peak at 10.25 per cent in October when energy bills rise again.
That is likely to be much faster than average pay increases, meaning that people will be able to afford less goods and services.
The Bank forecasts that the cost of living squeeze will begin to ease next year as inflation falls sharply.
However, there are many uncertainties in these calculations, not least the outcome of the war in Ukraine and the future path of the Covid pandemic,
The Bank expects energy prices to remain higher than they were before the pandemic until at least the end of 2024. It expects economic growth will remain barely above zero, meaning average households are not likely to see a major easing of the financial pressures they face for some time.
What about interest rates?
Interest rates are on the rise because they are seen as an important way to help contain price rises. It is hoped that increasing the cost of borrowing will help to cool the economy.
Borrowing costs for people on variable rate mortgages have increased and most analysts expect further rises in future.
The Bank’s governor, Andrew Bailey, has conceded that increasing rates will do little to tackle the main drivers of rising living costs, such as high energy prices.
Rising rates are expected to cool the UK’s overheated property market which has seen the average UK house price rise £24,000 to £278,000 in March 2022.