This morning the ONS announced that CPI inflation rose to 9% in the year to April, a level not seen since 1982, and significantly higher than the 7% rate in March. A key driver of inflation is the increased cost of energy; Ofgem’s updated energy tariff cap came into effect in April, raising the cap on average household bills on gas and electricity by 54% from the previous month, meaning a 70% year-on-year increase. In addition to the dramatic rise in the cost of gas and electricity, other factors such as the continuation of the war in Ukraine further increased prices of items such as petrol and food as well. The expiration of the temporary VAT cut for the hospitality industry also meant the tax on meals out and hotel stays increased from a rate of 12.5% back to 20% this month, while it was just 5% in April of last year.
Until this point, IFS work has shown that households across all income groups have faced similar rates of inflation. However, as the poorest households spend more of their total budget on gas and electricity, we now see inflation hitting the poorest households harder. In April, the bottom 10% of the population in terms of income faced an inflation rate of 10.9%, which was 3 percentage points higher than the inflation rate of the richest 10%. Most of this difference comes from the fact that the poorest households spend 11% of their total household budget on gas and electricity, compared to 4% for the richest households.
Heidi Karjalainen, a Research Economist at the IFS said:
"Inflation hit 9% in April. Because so much of the increase was driven by the increase in the gas and electricity tariff cap, poorer households who spend more of their budgets on gas and electricity, faced an even higher rate of inflation. We estimate that the poorest 10% of households faced an inflation rate of 10.9%. State benefits only increased by 3.1% in April. This means big real terms cuts to the living standards of many of the poorest households.
"Continuing pressures, such as the war in Ukraine, are likely to push Ofgem’s October tariff cap, as well as other prices including food prices, even higher later this year. We are likely to be in a prolonged period during which poorer households are facing rates of inflation even higher than the headline figures would suggest."