As inflation begins to moderate from the highs seen throughout 2023 and early 2024, there is some relief for the UK economy. However, the easing of inflation has not translated into significant financial relief for households, which continue to face intense pressure due to rising energy costs and persistent economic challenges.
Inflation eases but challenges persist
The UK’s inflation rate has shown signs of slowing down, a positive indicator that the Bank of England’s aggressive interest rate hikes may be starting to yield results. Despite this moderation, inflation remains above the Bank’s target of 2%, signaling that the cost of living is still higher than desired. Energy costs, a critical component of household budgets, continue to rise, compounding the financial strain on families. Ofgem, the UK’s energy regulator, recently announced a 10% increase in the energy price cap, set to take effect in October. This will push the average annual household energy bill from £1,568 to £1,717, further tightening the squeeze on household finances, especially as the winter months approach.
Impact on household finances
The persistent rise in energy costs, along with price increases in other essential goods, means that many UK households are still struggling to make ends meet. A report from the Institute for Fiscal Studies (IFS) highlighted that income growth has been sluggish, while poverty rates have continued to rise, particularly among low-income groups. The situation has worsened since the withdrawal of temporary government support measures, which were put in place during the pandemic to help families cope with financial difficulties. The outlook for household finances remains bleak. Even as inflation gradually comes under control, the combination of high energy costs and stagnant income growth is likely to keep many families under significant financial pressure. The government is facing growing calls to introduce targeted support measures to assist those most affected by the ongoing cost-of-living crisis.
As the UK enters the final quarter of 2024, the focus will be on how the government and the Bank of England respond to these persistent economic challenges. The government may need to consider implementing additional fiscal support measures, particularly aimed at vulnerable groups who are most impacted by rising costs. Meanwhile, the Bank of England will have to carefully manage its monetary policy to ensure that it does not stifle the economic recovery while continuing to combat inflation.
While the moderation in inflation is a welcome development, it is clear that the financial challenges facing UK households are far from over. Policymakers will need to remain vigilant and be prepared to take further action to support those who are struggling the most. For many families, the reality is that financial difficulties will likely persist well into the future, requiring sustained and thoughtful intervention from both the government and financial institutions.