London's Cost of Living Tracker: the impact of inflation
This section looks at how the prices that made up a household’s basket of goods and services in the three years to 2020 have changed. This allows us to look more specifically at how much a household now has to spend to get the same amount of food or energy, for example, as they were purchasing leading up to 2020. Use the drop-down menu to see the data split by income group, age group, and those in and out of poverty.
Inflation impact - percentage change in prices of goods and services for household income quintiles in London (February 2023)
There are differences in how much changes in the price of products and services contribute to a households’ overall spending increase and these depend on the original expenditure of each household. For example, essential items, such as bills and food, contribute a much higher proportion to the total increase in lower income households. The opposite is true for non-essential items.
If they were to purchase the same basket as in the three years leading up to March 2020, households on the lowest income quintile would see their basket increase in price by 24%. Essential items such as energy bills contribute 8% to this increase, while spending on food and non-alcoholic beverages represents 5%. Recreation and culture price increases contribute only 1% to the total increase and restaurants and hotels only 2%.
In contrast, households in the highest income category would see a 20% increase in their basket price. Energy bills contribute 3% to this increase while spending on Food and non-alcoholic beverages 2%, while Recreation and culture contributes 2% and Restaurants and hotels, 4%.
Inflation impact - estimated change in average weekly spending on goods and services for income quintiles in London (April 2017 to March 2020 and February 2023)
Households in the lowest income quintile now need to spend £72 to buy the same food and non-alcoholic beverage items that they bought for £57 pounds in the three years leading up to March 2020. They have to pay £51 to use the same amount of energy as they did leading up to 2020 Q1, when it cost them £23.
Households in the highest income quintile need to spend £99 in food and non-alcoholic beverages compared to £78 leading up to 2020 and £53 on energy bills compared to £24 in the three years to 2020 Q1.
Key findings
£28 and £29 - would be the weekly increase in energy bills for households with the lowest and highest incomes for the same consumption as in the three years to 2020 Q1.
8% and 3% - is the contribution of this increase in energy bills to the total additional amount households now have to pay to maintain the same standard of living as in the three years to 2020 Q1.
£15 and £21 - would be the weekly increase in food and non-alcoholic beverages for households with the lowest and highest incomes for the same consumption as 2017-2020.
5% and 2% - is the contribution of this increase in food and non-alcoholic beverages to the total additional amount households now have to pay to maintain the same standard of living as in the three years to March 2020.
This section looks at how the prices that made up a household’s basket of goods and services in the three years to 2020 have changed. This allows us to look more specifically at how much a household now has to spend to get the same amount of food or energy, for example, as they were purchasing leading up to 2020. Use the drop-down menu to see the data split by income group, age group, and those in and out of poverty.
Inflation impact - percentage change in prices of goods and services for household age in London (February 2023)
If an older household (65 years and older) in London were to buy the same shopping basket as they did in the three years to March 2020 again in February 2023, they would see a 25% increase in price.
The biggest contributor to this increase is the rise in energy bills, which contribute 7% to the overall increase.
The youngest households would have to spend 18% more to maintain the same standard of living as in the three years to March 2020. Rents, energy bills and restaurants and hotels have all contributed around 3% each to the overall increase in the price of their basket.
Inflation impact - estimated change in average weekly spending on goods and services for age in London (April 2017 to March 2020 and February 2023)
Older households need to pay an additional £16 each week, to buy the same food and non-alcoholic beverages as they did in the three years to March 2020 and to pay £30 more per week, on energy bills. Younger households need to pay £21 more on rent and £20 more on energy bills.
This section looks at how the prices that made up a household’s basket of goods and services in the three years to 2020 have changed. This allows us to look more specifically at how much a household now has to spend to get the same amount of food or energy, for example, as they were purchasing leading up to 2020. Use the drop-down menu to see the data split by income group, age group, and those in and out of poverty.
Inflation impact - percentage change in prices of goods and services by household poverty in London (February 2023)
Whether or not households were in poverty or not did not have a noticeable effect on how much inflation impacted baskets of goods and services overall. Both groups would see their basket in the three years to March 2020 increase in price by 21% if they were to purchase the same items again. However, the composition of this change is quite different for the two groups. The biggest increases for households in poverty have come from price rises in what can be thought of as essentials such as energy bills (which contribute 6% to the overall increase), food and non-alcoholic beverages (4%) and rents (3%). This is in contrast to households not in poverty, where essentials represent proportionally less of the total spend. While the overall increase in prices is very similar for both groups, households in poverty may find it difficult to reduce the current price of their basket by buying less quantity or trading down, without forgoing essential products and services.
Inflation impact - estimated change in average weekly spending on goods and services for poverty in London (April 2017 to March 2020 and February 2023)
Households in poverty would now have to pay £49 per week on energy bills in order to use the same amount of energy as in the three years to March 2020, when it cost them £22 - an increase of £27 per week. Households that are not in poverty would have experienced an increase of £28 (from £24 per week to £52 per week).
Key findings
£27 and £28 - the weekly increase in energy bills for London households in poverty and not in poverty if consuming the same as in the three years to March 2020.
6% and 4% - the contribution to the overall increase that these amounts represent.
Overview
This analysis explores what the impact of inflation would be if households were to continue spending in the same way as they did before the cost of living crisis. As such, it gives an indication of what impact inflation has had on the ability of households to maintain the same standard of living.
This is not an inflation measure in itself but tells us the effect that inflation has had on specific baskets of goods and services, that is, how much the prices that consumers pay for a specific shopping basket have changed over the last two years.
This allows us to understand how inflation affects different population groups and in the long run it will show how much prices have changed in total, even as inflation falls. Headline inflation figures alone will not give information about the price increases that remain after inflation has gone down.
One thing to keep in mind is that consumers change their behaviour when prices change. This means that the shopping basket of 2017-2020 will not be the same as the shopping basket today as many consumers will have made different choices in response to price rises. The analysis therefore cannot give us an exact picture of households’ current expenditure nor can it tell us how this has changed due to high inflation.
In addition, inflation indices represent average national prices, which means that we don’t have region-specific information on price changes. Therefore, it is likely that inflation figures underestimate London price increases, as the capital tends to be more expensive than the rest of the country. However, the analysis provides a useful reference point and contributes to our understanding of the impact of inflationary pressures on household spending.
Why this is needed
We are in a cost of living crisis and have been since late 2021 (Institute for Government). This has mainly been caused by high inflation outstripping wage increases - the Consumer Price Index, including housing costs (CPIH), has seen consistent month-to-month increases since March 2021. Prices of food and non-alcoholic beverages, housing and household services (driven mainly by energy bills), clothing and footwear, restaurants and hotels have all seen fairly consistent increases over the past year.
The Office for National Statistics (ONS) measures inflation by tracking the prices of several items in a "basket of goods" - as the price of the individual items change, so does the total price of this basket. The basket includes over 700 items ranging from food to rents. The ONS collects prices from different shops (e.g. supermarkets or off-licences) and in different parts of the country, which means that each month, around 180,000 prices are collected to calculate inflation.
Individual price changes are monitored monthly and presented in the form of a year-on-year change (inflation). This figure represents the percentage by which prices have increased for the whole of the UK population. However, these price increases are felt differently by different groups of people. The impact depends on people’s income and how much headroom they have to accommodate price increases, what they spend their money on and the part of the country in which they live. Also, inflation is not equal across products and services, so the headline inflation figure may be experienced as higher or lower depending on what households spend their money on.
We have conducted this detailed analysis to understand what these headline figures mean for the lived experience of certain population groups that are likely to be more seriously affected, with a focus on households in poverty or low incomes.
London had the highest rate of in-work poverty, when compared to the rest of the UK, which means that people living here could be particularly vulnerable to price increases. 41% of Londoners had an income below the minimum income standard in 2019 – this proportion has increased during the pandemic and through the current cost of living crisis. London also has much higher property prices than the rest of England and this can affect how inflation is felt. The price of rental properties is also increasing faster in London compared to the rest of the UK. Rents increased by 15% in inner London and 20% in outer London between 2014-19, compared to 10% outside of London. When surveyed, 24% of Londoners said they would not be able to afford an unexpected bill (this is similar to the UK average). Investigations by the Minimum Income Standard in 2019 revealed that it is up to 58% more expensive to reach a decent standard of living in London than in other urban areas of the UK, this is due to higher housing, childcare and transport costs.
Data
CLASSIFICATION OF INDIVIDUAL CONSUMPTION BY PURPOSE (COICOP)
This is the standard international classification of products and services for household expenditure. It is hierarchical, with individual items grouped into progressively higher categories. At its highest level, there are 13 categories (divisions) that describe all items of household expenditure.
We used the highest order categories to present expenditure data. We separated out some elements of division 04 (Housing, water, electricity, gas and other fuels), into the following categories: Rents (04.1 Actual rentals for housing), Mortgage interest and endowment policy premiums (04.2 Imputed rentals for housing), Energy bills (04.5 Electricity, gas and other fuels), House maintenance, water rates and council tax (all the rest 04 categories).
CPIH FIGURES, ONS
We used the disaggregated index of CPIH inflation available from the ONS. The index tracks price changes for each COICOP category as well as overall. The index base is in 2015 and we rebased this to the dates during which baseline expenditure data were collected (2017 Q2 to 2020 Q1).
LIVING COSTS AND FOOD SURVEY (LCFS)
We used three waves of the LCFS in order to have an adequate sample size. We decided not to use data collected during 2020/21 as pandemic lockdowns created exceptional circumstances; we instead used pre-pandemic data (2017/18 - 2019/20) as they were more representative of usual spending patterns. The survey runs in financial years, meaning that only 1-2 weeks out of the total of 36 months represented in the data we used, were impacted by lockdowns. We don’t expect this to affect our estimates significantly.
We extracted the LCFS expenditure variables that are included in each of the COICOP categories indexed in CPIH. We used COICOP+ codes to assign LCFS expenditure codes to COICOP class codes. This resulted in a long list of C- product codes, of which we only used the household totals (i.e. C- expenditure codes with a -t suffix). For expenditures without estimated totals in the LCFS, we used the Family Spending methods to calculate them.
We included mortgage capital repayment spending in the baseline expenditure, even though it is not tracked by CPIH, as it constitutes a big part of household spending. This expenditure remained the same at baseline and after inflation was applied. The household shopping baskets used in this project do not represent households’ total expenditure.