Cost of living crisis set to intensify again as bills mount despite surprise fall in inflation | Money News

The rate of inflation may have eased slightly but it is clear that UK households are facing a surge of rising costs ahead.

At an annual rate of 2.5%, the consumer prices index (CPI) measure of inflation for the 12 months to December is well below the energy-led cost of living crisis peak above 11%.

While that is obviously a relief, prices are still generally rising – just not as quickly.

Money latest: Reaction to inflation data amid warnings of rises ahead

Some rising bills ahead that we know of will be inflationary while others could be – it’s just too early to know given uncertainty hanging over the prospects for fresh Bank of England interest rate cuts and the effects of budget tax measures on employers from April.

Market jitters over the impact of Donald Trump’s return to the White House, which in turn have intensified scrutiny and pressure on the UK’s public finances, add to a complicated picture for the price outlook.

So where are the upwards pressures on costs in the UK all coming from? Here are 10 areas where they are likely, if not certain.

Everywhere?

It’s an unashamedly broad brush but it’s important to recognise the fact that business lobby groups have widely warned of a price punishment since the budget, which put firms on the hook for £25bn of tax rises announced by chancellor Rachel Reeves.

It means that from April, when measures such as higher employer national insurance contributions take effect, any business facing a higher tax bill could potentially pile that additional cost on to their customers.

In shops

When it comes to the subject of passing on budget tax hikes, retailers have been the most explicit about it.

That is because the likes of supermarket chains are among the country’s biggest employers, with Tesco alone expecting a £250m hit per year over four years, amounting to £1bn.

The British Retail Consortium has warned of food prices going up, rising by an annual rate of 4.2% by the year’s end, while two-thirds of top bosses across the retail industry as a whole are planning to raise prices.

At banks and lenders

Even after today’s inflation data, financial markets are still only pricing in two interest rate cuts over the year to date mainly because inflation is forecast to rise in the months ahead.

Analysis by Pantheon Macroeconomics on Wednesday forecast a figure of 3.2% in April.

Higher borrowing costs to help keep a lid on inflation mean elevated mortgage rates, in a year that is expected to see millions of households seek a new fixed deal.

There is also a risk the recent market turmoil, that has seen UK government long-term borrowing costs jump to levels not seen since 1998, pushes mortgage costs even higher.

Any rises in so-called swap rates, which determine the cost of financing home loans for banks, are typically passed on to the borrower.

On imports

A weaker pound – as recently witnessed during the market troubles – makes the cost of importing goods more expensive.

Sterling is currently 12 cents down on where it stood against the dollar at the end of September while it is more than two cents down on the euro.

The divergence in the falls tells you that the bulk of the pound’s problems are more tied to dollar strength than pound weakness.

It can be explained by the fact that investors are worried about the impact of universal trade tariffs threatened by Mr Trump pushing up domestic inflation in the US.

Fuel bills

The pressure on the pound as part of the aforementioned market event means that a double whammy for fuel bills is imminent.

A weaker pound, coupled with a rise in global oil costs which are priced in dollars, means that drivers are facing the prospect of further increases at the pumps beyond the 3p-a-litre seen since Christmas.

Brent crude oil is currently standing at $80 a barrel – up from $71 just a month ago.

Energy

Energy bills have been on the rise since October when a 10% increase in the energy price cap took effect.

While typical bills were up by a further 1% in January, further increases in wholesale prices in recent months are expected to be reflected in the cap from April.

The most recent forecast by industry experts Cornwall Insight saw a 3% hike from April to an average £1,785, though recent cold snaps across Europe, coupled with weak storage levels, have pushed up natural gas contracts since.

Benchmark British gas prices rose by 20% during the second half of December as colder weather led to higher demand across Europe. Weaker inventories will also mean that storage has to be replenished at a higher cost than seen after the previous, mild winter.

Water

It was announced just before Christmas that the average annual water bill across England and Wales was to rise by 36% over the next five years.

Just how much depends on where you live as the hikes vary by supplier. Southern Water customers face the heftiest increases from April through a 53% increase to £642 by 2030.

Council tax

Local authorities in England will be able to raise core council tax by up to 3% and the adult social care element by 2% in the coming financial year.

No final decisions have been taken across local authorities in Wales. In Scotland, where the bill includes water rates, rises of up to 10% are being considered by some councils after many years of frozen bills.

Mobile phones and broadband

Most customers are on plans which have links to December’s inflation rate.

Analysis by price comparison service uSwitch showed that mobile users faced average increases of £15.90 a year from April while broadband bills would go up by a typical £21.99.

It’s worth noting, at this point, that the communications regulator has banned contracts linked to the rate of inflation in favour of a set price increase to bolster transparency.

This applied to new contracts from January.

What about my ability to absorb price rises?

The good news here is that the pace of average wage growth has outstripped inflation since August 2023.

The trouble is, that has done little to make households feel better off in what is an evolving cost of living crisis.