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Inflation and Household Spending - June 2022

Key Findings

  • Rates of inflation are expected to continue to rise sharply for all consumers throughout 2022. Lower income households will experience a particularly high inflation rate since price rises are expected to be especially high for energy, fuels and food, which make up a greater proportion of their spending.   
  • We estimate that households with the lowest 40% of household incomes will experience an inflation rate greater than 11.5% in October 2022. 
  • For households with the lowest incomes, the share of household expenditure on just energy, fuel and food is predicted to increase by 9.2 percentage points to over a third of all spending by October 2022 if consumption patterns remain unchanged. By contrast it is expected to increase by 5.3 percentage points to over a fifth of all spending for households with the highest incomes.

Introduction

The rate of inflation reached 7.9% in May, but is expected to continue to rise in the coming months. The Bank of England is forecasting it to reach a peak of 11% in October. However, the headline rate reflects an average across the economy as not all households will experience price rises in the same way.  

In this article we draw together ONS data on the spending of families, official inflation data and predicted inflation rates to calculate measures of ‘lived inflation’ for different types of households and explore how they may be impacted by expected price rises. We have estimated the inflation rate for different households over the next 6 months running to the next energy price cap increase in October 2022, updating our previous analysis published in February 2022.

Full details on the methodology can be found here.

A differential inflation burden

Since consumers spend different proportions of their income on different products then the lived experience and impact of price increases varies across households. By weighting price increases by how much a household typically spends on a product we can estimate what effect the increase in prices will have in the coming months for different consumers (see methodology annex below for further details).

Looking to October 2022, the inflation rate is predicted to be highest for those on lower incomes. We estimate that the inflation rate in October 2022 for the first and second income quintiles, i.e. the 40% of households with the lowest incomes, will be 12.4% and 11.6%. This compares to 8.5% for the highest income quintile.

Higher inflation rates for lower income households are particularly problematic because these households will, on average, have tighter budgets and it is harder to avoid price rises on essential products. It is therefore likely to lead to greater incidence of financial difficulty. 

In terms of household composition, we predict that retired households and single parent with children households will face the highest rates of inflation in October 2022, 10.9% and 11.3% respectively. This contrasts with 9.2% for households with couples without children.

Impact on household budgets

Households are inevitably going to face higher bills if they maintain the same level of consumption of energy, fuel and food as pre-pandemic, and our ability to reduce spending on these items is often limited if we are not to go hungry, be cold or unable to get to work. Members of our qualitative panel told us they are feeling powerless in the face of these price rises, with many households at a tipping point where their financial resilience is being quickly eroded.

The burden is highest for the lowest income group, where we expect the share of expenditure needed to pay for these essentials will rise to 37.5% in October 2022 - an increase of 9.2 percentage points from September 2021. The rise is expected to be smallest for the highest income group, 5.3 percentage points rising to 22.1%. This shows that while all groups will have their living standards squeezed, lower income households face a dramatic reduction in discretionary spending which may lead to incredibly difficult choices and put people at risk of serious harm.

In monetary terms, the lowest income households will need to spend nearly £45 more per week in October 2022 compared to September 2021 if they want to maintain their pre-pandemic consumption level of energy, fuels and food.

This would be a significant burden for the lowest income incomes, with the average (median) weekly income for the first income quintile being £281 in the 2019/2020 LCFS survey. 

Turning to household composition,  the burden is highest for the single parent with children households and retired households.The increase between September 2021 and October 2022 for these households is predicted to be 8.6 and 8.2 percentage points respectively increasing to 33.3% and 33.1%.

In monetary terms retired households and single parent households will need to spend over £45 more per week in October 2022 to maintain pre-pandemic consumption levels of energy, fuels and food.

These are significant increases, which will push some households into making impossible decisions. Many households in our qualitative panel told us they were already making sacrifices.

Government support measures

Sustained high inflation will further burden households, especially those on the lowest incomes. To help alleviate some of this financial pressure the government has announced several support packages. These include all households receiving a £400 energy grant, while people in receipt of a means-tested benefit in July will also be eligible for a £650 cost of living payment.

These measures will help cover some of the financial burden on households. However, given the expected levels of inflation, these support measures will not cover the entirety of the predicted increase. Therefore the inflationary burden will need to be shared between households and the government. For those on the lowest incomes this may mean instead of maintaining a pre-pandemic level of energy, fuels and food, they will be cutting back on these essentials.

Contact us

If you have any questions or would like to find out more, please email Denise Lovett at consumerinsight@which.co.uk.

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