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London's Cost of Living Tracker - the unequal impact of inflation

Naoko Skiada, WPI Economics
Naoko Skiada, WPI Economics

Author: Naoko Skiada, WPI Economics

London's Cost of Living Tracker is a new tool from Trust for London and WPI Economics to help us to better understand the impact of rising costs on different demographics in London. Here, senior data insights consultant Naoko Skiada walks us through the key insights.

We’ve been in a cost-of-living crisis since late 2021, and we’ve all been hit by rising costs. But inflation doesn’t impact everybody in the same way. London’s Cost of Living Tracker helps us to see how rising costs have affected different types of households over the last three years. 

To create the tracker, we took household spending (what different households were spending money on, and how much) in the three years leading up to the pandemic as our starting point, and looked at how prices have changed since. By applying these price changes to each household's original spending, we can estimate how much that same basket of goods and services has changed in price since, for different types of households.

This is not a rate of inflation for households, as people will most likely have adapted their expenditure in response to inflation. But it gives us an idea of how much more they have to spend to maintain the same standard of living, and whether there are any differences in this between different kinds of households.

We looked at how price rises have affected households on different incomes, as well as different age groups and households classed as in poverty and out-of-poverty. On the whole, households on lower incomes have seen a bigger increase in the price of the basket of products and services that they consumed in the three years to the beginning of 2020. And older households have seen a bigger increase than younger ones.  

Inflation impact - the estimated percentage change in spending for London households, if buying the same goods and services (April 2020 - February 2023)

Specifically, lower income households saw a 24% increase in the price of their basket of goods and services - so they would need to spend a quarter more in order to maintain the same standard of living as they had  leading up to 2020. For higher income households the increase was 20%. When looking at households in poverty and those that are not we didn’t see a noticeable difference. Both types of household have seen a similar increase - around 21%. There are however differences in how households could potentially absorb this change in prices, which I will explain in the next section.

The differences in how inflation is experienced is partly due to the original expenditure of the household type. The headline inflation figure is an average of price changes in a variety of products and services - but households have different spending habits, and goods and services rise in price at different rates. For example, younger households spend a much higher portion of their expenditure on rents than older households, while older households spend a higher proportion of their expenditure on food and non-alcoholic beverages as well as energy, compared to younger households. At the same time, food and non-alcoholic beverages and energy costs, have seen large and consistent increases in prices since 2021, while the increases have not been as high or as consistent on some other items.

Although households on lower incomes spend less in total than those on higher incomes, a much higher proportion of their budget is spent on food and energy. For example, lower income households spend £57 per week on average on food and non-alcoholic beverages, which represents 17% of their expenditure. Higher income households spend £78 but this only represents 8% of their expenditure. In total, households in poverty spend almost half (47%) of their income on rent, food and energy, compared to around 23% for households not experiencing poverty. This means that the high price rises we have seen on food affect lower households’ total spending more. There is less room to cut back.

Average weekly spending on goods and services, in pounds, for household income quintiles - baseline (April 2017 - March 2020)

The picture is similar when we look at energy bills. Lower and higher income households would see similar increases in absolute prices if they were to use the same amount of energy that they did in the three years to 2020 - £28 and £29 respectively. However, for lower income households, this increase contributes 8% to the overall increase in spending, compared to 3% for higher income households. Even more striking, for food and non-alcoholic beverages the increase in absolute prices is £15 for lower income households and £21 for higher income ones. The contribution to the overall increase in prices though is 5% for lower income households and only 2% for households with the highest incomes. 

Whether or not households were in poverty or not did not have a noticeable effect on how much inflation impacted baskets overall. However, these two groups have very different spending habits.

Inflation impact - percentage change in prices of goods and services by household poverty in London (February 2023)

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%), in contrast to households not in poverty, where essentials represent proportionally less of the total spend. While the overall increase in prices is almost the same 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.

Price rises have been large for everyone, ranging from 18% to 26%. But lower income households have been hit a lot harder as they need to spend more to maintain the same standard of living compared to higher income households and at the same time, will be much less able to adapt their budgets to absorb any increase in prices.

This is an important issue to consider - we usually differentiate households on their income but this analysis shows how important it is to take spending into account, as it can identify other areas that we need to focus policy and support in. 

This tool will be updated quarterly and will help us to see where the pressures on household spending are coming from. While people can adapt to price changes in some areas, this is not so easily done on essentials such as energy and housing.

Explore London's Cost of Living Tracker