UK household inflation gap highlights uneven impact of energy shock
Differences in household spending patterns leave low-income families more exposed when food and energy prices rise together in the UK. At the peak of the October 2022 cost-of-living crisis, the poorest tenth of households faces inflation of 14.5%, more than three percentage points above the 11.1% consumer price index rate.
Highlights
- Office for National Statistics data show food and energy make up nearly 25% of the poorest UK households' spending versus 14% for the wealthiest.
- After the Bank of England policy rate peaks in August 2023, mortgage interest adds two percentage points to the richest decile’s inflation, versus 0.4 points for the poorest.
- Britain’s cost-of-living crisis became briefly progressive in 2023, but inflation remains above the 2% CPI target and further energy shocks may worsen inequality.
Household spending patterns drive inflation divide
As reported by Financial Times, data discussed from the Office for National Statistics’ Household Costs Indices show that headline inflation masks a wide divergence in what different households experience.Food and energy account for nearly a quarter of spending by the poorest households, compared with 14% for the wealthiest. When those two categories rise at the same time, lower-income households face almost double the inflationary impact, regardless of the monetary policy response.
BoE policy shifts pressure toward wealthier households
The pattern changes in 2023 and 2024 as the Bank of England’s response to the shock feeds through to mortgage interest payments. After the BoE policy rate peaks in August 2023, mortgage interest payments contribute two percentage points to the wealthiest decile’s inflation rate, compared with 0.4 percentage points for the poorest.That means Britain’s cost-of-living crisis is regressive in 2022 and then briefly progressive in 2023. Although the gap between households’ inflation experiences has narrowed, inflation remains above the 2% CPI target, and any renewed persistence from energy prices in the second half of this year could again hit income groups unevenly.
In our earlier coverage of the UK minimum wage debate, we explained that after years of rapid rises in the national living wage, the Low Pay Commission warned that pushing it much higher could raise the risks of job losses and add to inflation pressures. The analysis highlighted growing strain on low-wage sectors such as hospitality and the government’s caution over youth employment as it weighs future wage-setting targets.
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