Budgets & fiscal events
·
Incomes

Counting the cost

The impact of five years of high inflation on living standards

Mike Brewer
Mike Brewer
Alex Clegg
Alex Clegg
Zachary Leather
Zachary Leather
Jonathan Marshall
Jonathan Marshall
James Smith
James Smith

This briefing note takes stock of five years of successive cost of living crises, examining how the surge in prices since 2021 has hit household incomes, finances and living standards across the income distribution. It also assesses how a new energy shock, triggered by the war with Iran, will add to that damage. It argues that the Government should focus fresh support tightly on the poorest households, starting with help on energy bills.

Key findings

  • Inflation first rose above the 2 per cent target in May 2021 and peaked at 11.1 per cent in 2022, its highest rate in over 40 years. A return to target had been expected this spring, but the war with Iran has caused another energy crunch, pushing inflation to around 3 per cent this summer, and it is widely expected to exceed 4 per cent early next year. As a result, in the five years since inflation was last at the 2 per cent target in July 2021, the UK has experienced the equivalent of 13 years’ worth of ‘normal’ inflation, with prices nearly 30 per cent higher.
  • Successive governments have spent heavily in response: the Energy Price Guarantee alone cost over £20 billion. But much of that support was poorly targeted, and nearly all of it has now expired.
  • We estimate that real median non-pensioner income would have been £2,900 higher in 2026-27 in the absence of the cost of living crisis. Real median non-pensioner household income fell by 1.3 per cent (£450) between 2020-21 and 2026-27. Without the crisis, pre-pandemic forecasts imply it would have risen by 7.2 per cent (£2,500).
  • Households cut their gas and electricity use by 13 per cent across 2022 and 2023, with the poorest neighbourhoods cutting back most. Yet at the peak of the crisis, families were still spending 57 per cent more on energy in real terms than before the pandemic.
  • Arrears on priority bills remain high. The proportion of households in the poorer half behind on utility and household bills stood at 18 per cent in March 2026, up from one-in-ten in September 2020. The proportion of poorer renters behind on rent was 22 per cent, double the 2020 level and close to its peak.

Recommendations

  • New support should be targeted at the families facing the greatest hardship rather than spread across all households. With the country poorer, more borrowing would only push the costs into higher interest rates.
  • Help with energy bills should be the first priority, given how sharply poorer families have cut their energy use and fallen behind on bills. Support should be targeted on the basis of the highest income among a household’s residents, and a £2 billion scheme could provide an average of £175 per eligible household.

Further reading

Counting the cost
The impact of five years of high inflation on living standards
·
Mike Brewer, Alex Clegg, Zachary Leather, Jonathan Marshall, James Smith
Policy Landscape 2026
·
Anand Menon, Ruth Curtice
Losing energy
How have households across the country responded to fuel-price shocks?
·
Zachary Leather, Amber Rajham

https://doi.org/10.63492/vxy3542

Mike Brewer
Mike Brewer Deputy Chief Executive
Alex Clegg
Alex Clegg Senior Economist
Zachary Leather
Zachary Leather Economist
Jonathan Marshall
Jonathan Marshall Principal Economist
James Smith
James Smith Chief Economist