3 important factors to consider as the cost of living crisis evolves

The latest figures from the Office for National Statistics (ONS) confirm that UK inflation for the 12 months to January 2024 held steady at 4%. This comes after a surprise, albeit small rise of 0.1% from December. 

Bank rates, meanwhile, remain high (good news for savers) and wages are rising, helped by the government’s recent National Insurance (NI) cut.

And yet millions of UK households are still feeling the squeeze. The cost of the living crisis hasn’t ended, then, but it has evolved.

Keep reading to find out what this means for you.

The cost of living crisis peaked at the end of 2022

Inflation had been rising since the UK emerged from coronavirus lockdowns in 2021 but the Consumer Prices Index (CPI) didn’t peak until October 2022. At that point, it reached a 41-year high of 11.1%. The CPI remained in double figures until April 2023.

As the price of household goods increased, energy bills soared. Originally introduced in January 2019, the energy regulator Ofgem’s price cap began to rise, by 54% in April 2022, with a further 80% rise planned for 1 October 2022. The short-lived Liz Truss government stepped in with the Energy Price Guarantee. 

The Energy Price Cap rose by 5% on 1 January 2024 but is widely anticipated to fall again in April. 

While household bills might be falling, inflation is still double the Bank of England’s (BoE) 2% target. And while the recent NI insurance cut will increase your take-home pay, your tax bill could still be rising. 

So, what will 2024 bring?

Inflation is expected to fluctuate before hitting 1.9% in 2027

The BoE is tasked with maintaining inflation at a target of 2% and one of its main tools for achieving this is the BoE base rate.

When its Monetary Policy Committee (MPC) met in February 2024, they opted to keep the base rate at 5.25%.

It had stood at a historic low of 0.1% between March 2020 and December 2021, before tentatively beginning to rise. The rate then increased for 14 consecutive meetings, reaching 5.25% in August 2023.

Minutes from the latest MPC meeting confirm that the CPI is expected to hit the 2% target temporarily in early-to-mid 2024 before rising again. It will then stay above target until 2027.

This means that the strain on household bills will be with us for some time to come. And remember that even with inflation well below its 11.1% peak, prices aren’t coming down, they’re simply rising more slowly. They’re also well above the prices we might have expected to be paying pre-crisis.

Energy bills meanwhile are currently capped at £1,928 a year but MoneySavingExpert expects this to drop to around £1,620 in April and again, to £1,497 a year by July.

Stealth taxes could mean you’re still out of pocket, despite the recent National Insurance cut  

High inflation over the last two years or so has meant bad news for workers, with wages failing to keep pace. This amounted to a real-terms pay cut.

Wages are now growing faster than inflation, though. And coupled with the government’s recent NI cut means that the money in your pocket each month should be rising.

But stealth taxes in the form of threshold freezes and falling allowances could still be costing you. And with many freezes in place until 2028, it’s a problem that’s not going away.

One such freeze is to the Personal Allowance. This is the amount you can earn before you become liable for Income Tax. It last rose in 2021 and was frozen at that point until 2026. That freeze has since been extended to 2028. The allowance currently stands at £12,570. 

It’s important to remember that the freeze affects not only your wages but your retirement income too. Your pension payments (outside of any tax-free cash entitlement) will likely be taxed as income. 

As your wages or index-linked pension payments increase, you could find yourself moving into a higher threshold and paying more tax. The higher-rate bracket is also frozen until 2028. 

A BBC report from last year refers to what the Institute for Fiscal Studies (IFS) called “the biggest tax-raising drive since the late 1970s”. The BBC suggests that the freeze could see 2.6 million more people move into the higher bracket, with teachers and nurses among those affected.

With the freeze in place for another four years, inflation and wage growth could mean you need to factor higher taxes into your household budgeting.

Get in touch

If you have any concerns about the robustness of your household budget or your long-term financial plans, contact us now to see how we can help. Get in touch via email at enquiries@hda-ifa.co.uk or call 01242 514563.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.