The cost of living is increasing faster than at any point in recent history. Last month, the annual inflation rate soared to 5.5%, a 30-year high. This means that up and down the country, clothes are more expensive, fuel bills are rising, and the cost of the weekly shop is increasing. But this won’t be the end of the inflation story. The Bank of England forecasts that by April, inflation will peak at 7%, while the Resolution Foundation estimates that the economic impact of the conflict in Ukraine could push peak inflation above 8%.
The impact of inflation will be felt across the income spectrum but its effect will not be equal, as anti-poverty campaigner and writer Jack Monroe recently pointed out. While some in Britain have increased their savings during the pandemic, this was not the case for those on low incomes. The unequal impact of inflation and lack of savings means that the households that are the least able to respond to price rises are also impacted the most.
The reality of high inflation will be stark. Food banks will be required to distribute even more than the 2.5 million emergency food parcels they did last year. In 2019/20, the Joseph Rowntree Foundation found that 18.2 million people (27.7%) were living under a socially acceptable standard of living. New analysis from NEF now estimates that by April this will have increased to 23.4 million (34.2% of the population). Alarmingly, the average shortfall for those below this threshold will be £8,600 per year.
To measure the cost of living we use the Minimum Income Standard (MIS) as calculated by Loughborough University’s Centre for Research in Social Policy. Household budgets for different family types are calculated based on what the public thinks is needed for an acceptable standard of living. We can then compare these budgets to people’s incomes, creating an accurate picture of how many people will be unable to afford the cost of living. Below are some examples of weekly budgets for different family type:
The cost of living will rise by around £20 a week for most family types MIS after housing costs (AHC) for four different family types in 2021 and our estimated 2022 scenario
MIS AHC 2021 | Estimated MIS AHC 2022 | |
Single adult, working age | 206.55 | 225.49 |
Couple, pensioners | 290.76 | 312.25 |
Lone parent, two children; one aged 2 – 4 and one primary school age | 378.02 | 408.13 |
Couple, two children; one aged 2 – 4 and one primary school age | 471.41 | 507.11 |
Note: 2021 data taken from Minimum Income Calculator UK, the 2022 MIS estimate assumes that the prices of all non-energy goods grow at the same rate between now and the Bank of England inflation forecast for April 2022. Adjustment for the energy price cap takes into account the 54% increase in energy prices in April and adjusts other inflation estimates accordingly.
Using the latest Bank of England forecasts and Office for National Statistics data on inflation for different items, we have estimated the value of the MIS for April 2022 using budget breakdowns from the MIS in 2021. We base our inflation on the Bank of England’s forecast of 7% in Q2, but account for the 54% increase in the energy price cap. A breakdown of the weekly budget for a single working-age adult household in 2021 and our 2022 forecast is shown below.
Our calculations show that adjusting for the price cap is important and with fuel costs set to rise further in October, they will make up an even more significant part of people’s budgets from now on.
To estimate incomes in April we have used the IPPR tax and benefit microsimulation model based on data from the Family Resources Survey. We include all upcoming policy changes like the increases in the national minimum wage, changes to national insurance and benefit uprating. We also include the £150 council tax rebate given to all those in council tax bands A to D.
Our results show that by April 2022, 23.4 million people will have incomes below the MIS, making up 34.2% of the UK population. The increased cost of living will mean that 48% of children will be living in households unable to provide them a decent standard of living. Growing up in poverty is highly detrimental to children’s life chances, yet those living in single-parent households or where no one works are being left behind, with an estimated 77% and 96% respectively living under the standard from April.
When compared to before the pandemic we see that the number of people who are not meeting the MIS will increase for all family types. People were still struggling in 2019 but now many more have joined them.
Nearly half of all children will be living below a socially acceptable standard of livingHouseholds below MIS by family type
% Under MIS, 2022 | Number of people under MIS, 2022 | % Under MIS, 2019 | |
All | 0.34 | 23,400,000 | 0.28 |
Children | 0.48 | 7,000,000 | 0.4 |
Children in workless families | 0.96 | 1,500,000 | 0.89 |
Children in working families | 0.42 | 5,500,000 | 0.22 |
Couple with children | 0.36 | 8,700,000 | 0.31 |
Couple, no children | 0.19 | 2,200,000 | 0.16 |
Single with children | 0.77 | 3,900,000 | 0.71 |
Single, no children | 0.42 | 5,200,000 | 0.32 |
Single, pensioner | 0.31 | 1,700,000 | 0.27 |
Couple, pensioners | 0.17 | 1,800,000 | 0.12 |
Note: NEF analysis of the Family Resources Survey using the IPPR tax-benefit model, our 2022 MIS estimate is based on Bank of England forecasts and the upcoming energy price cap increase. 2019 figures taken from Households below a Minimum Income Standard: 2008/09 – 2019/20
The implication of living with an income below the MIS is having to choose between everyday essentials. The average couple with children with an income below the MIS will miss the threshold by £184.61 per week. This shortfall is greater than any element of the MIS, with the largest component being food and drink at £130.55 per week. Missing the MIS by such a large amount will force people to make impossible choices.
These same trends extend to every region of the UK. Results by region show that all regions will see an increase of people living under the MIS compared to before to the pandemic. We estimate that the north-east and Yorkshire and the Humber have experienced the largest increase in households unable to afford the essentials since 2019, overtaking London by just under 5%.
While we estimate the north-east will have the highest proportion of people under the MIS, in London and the West Midlands, those with incomes under the MIS are missing out on a good standard of living by an even greater average amount.
People in London and West Midlands will experience a deeper gap in income and the cost of livingNumber of people and average amount under the MIS by region
Region | Number of people under MIS (millions) | Average annual amount under MIS |
North-east | 1,200,000 | £8,900 |
Yorkshire and the Humber | 2,300,000 | £8,600 |
West Midlands | 2,300,000 | £10,100 |
London | 3,600,000 | £10,100 |
Wales | 1,200,000 | £7,600 |
North-west and Merseyside | 2,700,000 | £8,200 |
East Midlands | 1,700,000 | £7,000 |
Northern Ireland | 700,000 | £7,900 |
Scotland | 1,700,000 | £7,500 |
South-west | 1,800,000 | £8,600 |
Eastern | 1,800,000 | £7,800 |
South-east | 2,400,000 | £8,800 |
Note: NEF analysis of the Family Resources Survey using the IPPR tax-benefit model, our 2022 MIS estimate is based on Bank of England forecasts and the upcoming energy price cap increase.
Our latest analysis shows that millions of people across Britain will be struggling with the cost of living come April. In short, 5.2 million more people will be living below the MIS compared to prior to the pandemic.
The UK is in desperate need of a ‘Living Income’, a new social security system that guarantees everyone the minimum income they need to meet the challenges and opportunities of our fast-changing economy. NEF proposes initial steps on how to get there:
- Uprate benefits by the latest level of inflation to ensure that incomes rise alongside prices. Benefits are usually uprated by CPI from the previous September, but this year that means they will only increase by 3.1%, far below the expected inflation come April.
- Restore the £20 uplift for universal credit (UC) and extend to all other means-tested benefits to ensure that the poorest are at least made no worse off on average by the recent price rises. In addition, we propose investing a further £7 – 8 billion in UC to lift families closer towards the MIS, effectively reversing the cuts to working age benefits since 2010.
- ‘Auto-enrol’ everyone onto the UC system so that the 1.3 million people missing out on payments worth an average of £7,300 a year receive the support they are already entitled to. Going forward, this would also mean that anyone requiring support in future would receive their UC award automatically as soon as their income drops, on a similar basis to how tax changes automatically when income rises. This would also mean no more sanctions and no more five-week wait.
- Replace the personal allowance of income tax with a new cash payment that goes to everyone earning less than £125,000, will boost the incomes of the poorest 10% by around £1,200 a year on average, while lifting half a million people out of poverty at no net cost to government.
The cost of living only becomes a crisis when people cannot afford it. For this reason it is crucial that state support must be able to respond flexibly. There is now precious little time left for the chancellor to take action to avert the worst real-terms incomes squeeze in 50 years. The spring statement later this month represents a final chance to intervene — the government must not miss this opportunity.
