Inflation and Household Spending - Autumn 2023
Key Findings
- The ‘lived’ inflation rate experienced by different income groups and household compositions converged in October 2023.
- However, this follows lived inflation rates being higher for those on lower incomes during the cost of living crisis, and the cumulative effect of the crisis continues to place a heavier burden on lower income and retired households.
- We predict that inflation will continue to fall to around 4% by autumn 2024 for all income groups.
Introduction
Inflation peaked in autumn 2022 and has dropped significantly, in the 12 months to October 2023 it was 4.6%. The changes are driven largely by lower energy prices and slightly faster than the Bank of England expected. However, this decline from the peak is forecasted to be slower than the rise, and the overall rate of CPI inflation is not expected to return to the Bank of England’s 2% inflation target rate until the end of 2025.
Falling inflation rates are welcome, however the effects of the recent cost of living crisis will be felt for some time and the impact of this will vary across groups of consumers. ONS and Bank of England inflation estimates and predictions are based on an average consumer, but we know that consumers spend different proportions of their income on different products and therefore their lived experience of price increases will vary.
By weighting price increases by how much a household typically spends on a product we can estimate ‘lived’ inflation rates for different types of households (full details of the methodology can be found here). In this article, we present our latest lived inflation estimates and forecasts for different income groups and household compositions.
Inflation has peaked but the decline is slower
Our lived inflation estimates peaked last autumn for all income groups [1] and household compositions. Inflation is now falling for all groups largely driven by lower energy prices.
Those in the lowest income decile spend a higher proportion of their total expenditure on energy 7.4% compared with only 3.5% for the highest income decile [2]. Since energy was a key driver of inflation in 2022, those on the lowest incomes experienced the steepest increases in inflation, peaking at 11.3% and 11% in October 2022 for the first and second income quintiles respectively. Inflation peaked at a lower rate for those on the highest incomes, 8.8% in October 2022.
A secondary effect of increased energy prices was high food inflation throughout 2023. Once again those on lower incomes are impacted the most as they spend proportionately more on food and drink than those on higher incomes. For those in the lowest income decile it made up 15% of their expenditure compared to only 8% for those in the highest income decile [3]. This disparity in expenditure on essential goods has contributed to a continued higher inflationary burden for those on the lowest incomes.
However, as inflation on essential products now starts to ease, our lived inflation estimates for different income groups have converged. In October 2023, for the first time in over two years, those with the highest incomes had a higher inflation rate than those with the lowest incomes, 5.3% compared to 5.1%.
We now expect those on higher incomes to have higher levels of lived inflation over the coming year than those on lower incomes. Looking ahead, we forecast the lived inflation rate will be 3.9% for those with the highest incomes in October 2024 and 3.5% for those on the lowest incomes.
For the first time in over two years those on the lowest incomes have a lower inflation rate than those on the highest incomes.
Source: Which? Analysis of ONS Inflation and ONS LCFS data. We use inflation predictions for energy from Ofgem and Cornwall Insight, and for food from IGD and all other categories based on Bank of England November report forecasts.
We find similar results when comparing different household compositions. Retired households have been acutely impacted by the recent cost of living crisis, in October 2022 their estimated inflation rate was nearly 2 percentage points higher than the next highest household composition, 11% compared with 9.1% for single parent households.
Throughout 2023, inflation decreased significantly for all household compositions and our estimates have now converged. In October 2023, households with children and retired households had the lowest estimated inflation rates at 4.9% and 5% respectively. In contrast single households and couples without children had estimated inflation rates of 5.3% and 5.4% respectively. These estimates are still well above the Bank of the England target and it was over two years ago, in July 2021, that our lived inflation estimates for all household compositions were last below 3%.
Retired households have been acutely affected by the recent cost of living crisis
Source: Which? Analysis of ONS Inflation and ONS LCFS data. We use inflation predictions for energy from Ofgem and Cornwall Insight, and for food from IGD and all other categories based on Bank of England November report forecasts.
Looking ahead we estimate that by October 2024 retired households will have the lowest inflation rate of all household compositions at 3.5%. These predictions are more aligned with our lived inflation estimates prior to the cost of living crisis.
Although we predict inflation rates will decrease throughout the next year (to October 2024) the decline from the peak will be slower than the rise to the peak. At the end of our forecast period, our lived inflation estimates are around 4% for all groups and still well above the Bank of England’s 2% target rate of inflation.
Cumulative effect of the inflationary burden
Although we expect inflation to continue to fall and for inflation to converge between groups, positive inflation still means prices are rising. July 2021 [4] was the last time our inflation estimates for income groups were below 3%. Since then prices have risen by 19.3% for the lowest income quintile and 16.6% for the highest income quintile.
Carrying forward our inflation predictions, we do not expect the price indices for income groups to converge. Put simply, while those on lower incomes now face relatively lower lived inflation, the difference between groups is not comparable to that seen during the cost of living crisis when the burden was greatest for those on the lowest incomes, and it is not enough to address the cumulative effect of recent times.
By October 2024 we still estimate that those on the lowest incomes will be facing a higher price level than those on higher incomes, 23.5% higher than July 2021 compared with 21.2%.
We don’t anticipate price levels to converge between income groups
Source: Which? Analysis of ONS Inflation and ONS LCFS data. We use inflation predictions for energy from Ofgem and Cornwall Insight, and for food from IGD and all other categories based on Bank of England November report forecasts.
The results for household compositions are very similar. We estimated that since July 2021, price levels for retired households have increased by 19.2% compared to 16.2% for couples with children. Again, by the end of our forecast period, we don’t expect the price indices for different household compositions to converge.
We also don’t anticipate price levels between household compositions to converge by autumn 2024
Source: Which? Analysis of ONS Inflation and ONS LCFS data. We use inflation predictions for energy from Ofgem and Cornwall Insight, and for food from IGD and all other categories based on Bank of England November report forecasts.
Take a look at the full time series on our lived inflation dashboard.