The cost of living – August 2022 update
The cost of living crisis increasingly dominates the outlook for London, threatening to widen existing inequalities, halt the recovery from the pandemic and push many into being unable to afford necessities.
Our latest report builds on previous work at the start of this year to set out an evidence base on the impact of the cost of living crisis on Londoners. Using opinion polling, economic data, analysis of trends and discussion of past episodes of high inflation, it presents a difficult picture for the months ahead.
Prices across the board are rising more rapidly than they have since the 1980s, and Bank of England projections point to inflation accelerating further later this year. Global energy costs are soaring due to the war in Ukraine, and the Ofgem standard tariff for consumer energy bills is set to surge again in October and January.
Meanwhile, wages are falling well behind inflation, with real household incomes set for some of the worst conditions since the Second World War. And pay growth has tended to be strongest in the best-paid sectors, reinforcing income inequalities.
Our polling research suggests that nearly one in five Londoners is financially struggling – that is, struggling to make ends meet, relying on debt to pay for basic needs or having to go without them. Another three in ten Londoners are just about managing. These proportions have risen over recent months and are much higher among groups of Londoners who already face stark inequalities.
The profile of price increases in London is also troubling. Our data research suggests that London is experiencing faster inflation in some prices than in the wider UK, with food prices a major contributor to that gap.
As the rising cost of living drags on incomes and spending, the Bank of England now projects a recession in its baseline forecasts for the UK. There are reasons to suggest that London’s aggregate economy may prove more resilient to the shock of inflation than the rest of the UK. However, past recessions following high inflation have seen the opposite experience, meaning a healthy recovery for the capital cannot be taken for granted.
The evidence points to an acute challenge for all Londoners, but especially those who were already in a precarious financial position.
How Londoners perceive the cost of living
- 90% of Londoners say their household costs have risen over the last six months.
- 19% of Londoners are ‘financially struggling’, while another 30% are ‘just about managing’. Just under half of Londoners have struggled or fallen behind on financial commitments, with credit commitments the most common struggle.
- 12% of Londoners said they have regularly or occasionally been unable to buy food or essential items or relied on outside support in the last six months. This proportion triples (39%) among Londoners who say they are ‘financially struggling’.
- Responses on the GLA’s Talk London platform give examples of Londoners saying the rising cost of living makes the capital increasingly inaccessible except for the richest.
Price trends in London
- Evidence suggests that some prices in London are rising faster than across the wider UK.
- Food is one of the largest pressures pushing the capital’s inflation above the national average. This will affect the lowest-income Londoners the hardest.
- Some key inflation drivers are less of a concern for Londoners, such as energy, petrol and vehicle prices. But Londoners spend more on private rentals, where prices may soon accelerate rapidly – an area where inflation is not just a result of global trends.
Pay trends in London
- While pay in London recovered very strongly from late 2020 to early 2021, real wages have started to go into reverse as inflation picks up. And pay growth has tended to be strongest in the best-paid sectors, reinforcing income inequalities.
- Pay in Hospitality, the lowest-paid industry in the private sector, has fallen 1% since the pandemic, while median pay in IT, already 50% above the London average before the pandemic, has risen 20% up to July this year.
- Labour productivity growth has been weak in London and the UK since 2019, limiting the ability of firms to absorb higher wage costs, while the labour market is still not fully recovered from the pandemic.
Public sector pay and inflation
- During the pandemic, public sector pay growth was more stable than private sector wages. However, the recovery has seen private sector pay growth rise much faster.
- While research suggests public sector pay growth tends to affect private sector pay growth in the short term, this is not across all industry sectors, and in the long run public sector pay growth does most of the adjustment towards private sector rates.
- After a long period of pay restraint, the balance of risks lies more with public sector recruitment difficulties and skills shortages than with pushing up private sector pay.
Overall inflation trends
- CPI annual inflation hit a 40-year record high of 9.4% in June. Energy bills, fuel and food are the biggest contributors, but prices are rising on a broad basis. The average annual shop is rising in price by an estimated £533 a year.
- The war in Ukraine is likely the single largest driver of inflation now, as the fear of gas, oil and agricultural commodity shortages drive up global costs.
- Rising inflation will affect those on the lowest incomes the worst. NIESR estimate the rise in living costs will equal an income cut of 9.5% for the hardest-hit households, compared to just 0.6% for the highest-income 10% of households.
- Inflation may take until winter to peak and then fall slowly. High inflation is likely to drag on real incomes, dampening demand and slowing output growth. It is possible that cooling commodity markets and falling demand pull back inflation more quickly.
Historic periods of high inflation
- In past eras, fighting inflation has usually prompted a recession. London’s downturns in the 1980s and 1990s were deeper than in the wider UK, and recovery took longer.
- Macro policy and the UK’s economic structure have shifted over the last 50 years in ways that should help fight inflation.
- However, there are some signs that inflation expectations have recently come at risk of de-anchoring from low and stable rates. This could prompt the Bank of England to tighten monetary policy aggressively to bring expectations in line, raising the risk of recession.