Nearly three in five Britons think the cost of living crisis will never end, and the data gives them reason to worry: the average UK wage buys no more than it did in 2005. All nine Prime Ministers in office since then have tried to break the cycle but with limited success - partly due to factors outside their control but also because most of the levers they could pull to improve things for some people have drawbacks. This is why, for a significant chunk of the country, the squeeze feels permanent.

Ask your friends, family, colleagues what they think of as the ‘cost of living’ and you will likely hear the same thing: the increasing price of basic necessities such as food, energy, housing and transport. Ask the economic organisations - primarily central banks such as the Bank of England or the European Central Bank - tasked with managing inflation, and they have a slightly different definition. They still track prices, but of a broad ‘basket’ of goods and services including everything from toothpaste to pet grooming, weighted to account for their importance to households. This is the Consumer Price Index (CPI). The Office for National Statistics (ONS) computes how much this basket has risen every month, and the Bank of England then decides whether to increase or decrease interest rates to try and keep prices in line with a ‘target’, manageable, rate of inflation, typically 2%.

By either measure the squeeze is real. Of the 20 items that have increased in price most between 2020 and 2025, 11 were food items, many of which are inputs into other foods we buy, such as vegetable oil and sugar (Figure 1). And between 2020 and 2025, the typical item in the CPI rose by about 30%, against 7% in the previous five years. This is roughly three times what inflation at the 2% target would have led to.

Figure 1

The weighting of each price by its share of actual household spend shows what hits budgets most: rents, gas, electricity, restaurants and holidays (Figure 2). Some of these are costs we cannot escape even when there is a crisis - demand is ‘inelastic’ as it is difficult to move for lower rent, and hard to reduce energy consumption below a minimum floor. While we can cut down on eating out and holidays, doing so contributes to the sense that a decent quality of life is increasingly unaffordable.

Figure 2

The cost of living crisis is not unique to the UK. The wars in Ukraine and Iran have constrained the supply of fuel, gas and fertiliser, pushing up prices of energy and food production globally. These are global issues that can’t be solved by the UK government - the UK can’t make foreign gas imported from the Middle East cheaper, and it can’t reduce prices of olive oil produced in southern Europe.

But if you look at how the UK compares to our European neighbours, you can get a sense of where there are uniquely British drivers of the problem (Figure 3). In some areas, our prices have risen much faster than our peers - like rents, out of home food consumption, clothing and holidays. That suggests there is scope for domestic policy decisions to make a difference, and it is not just a case of equally inherited woes. Likewise there are some areas where the UK’s prices are doing comparatively better - food or cars - which suggest UK policy choices might be doing something right.

It is worth noting that inflation data is noisy so it is difficult to isolate precise drivers of price increases - and some categories may be more expensive because we have made proactive policy choices to make them so as with tobacco - but the trend of disproportionately high UK prices is notable.

Figure 3

Prices are only half the picture. Would we care about prices doubling if our income doubled as well? The answer is probably yes because we tend to attribute price increases to factors outside our control and wage increases to our own ability, but regardless, a more meaningful measure of cost of living is one that accounts for our income as well as the price of the goods we buy. In other words, our ‘real wage’.

By this measure the UK also has a problem. The average UK wage buys no more today than it did in 2005 (Figure 4). Only Italy is worse off, but the Netherlands, France, Denmark, Germany, Spain and the US all did better.

The UK’s wage stagnation hides disparities that matter for why almost everyone is feeling the pinch. The lowest paid workers have actually experienced modest wage growth given policy choices to increase minimum wage etc, but these will feel limited given the larger share of their income spent on necessities. And earners above minimum wage are feeling squeezed because the average wage hasn’t risen in real terms in decades. Wage growth - where it exists - is actually a product of protective policy choices for the most vulnerable, rather than a product of economic growth driving up incomes for everyone.

For the issues which are fairly uniquely ours - housing, energy, food and services or holidays - there are few short-term measures which do not prolong the crisis by driving inflation, and few long-term measures which will yield short-term relief. We will be digging into the options and trade-offs in our next blog.