In May 2022, the Consumer Price Index reached 9.1 per cent. It is the fastest rate in the last 40 years. According to the Bank of England, inflation will keep rising up to around 10 per cent at the end of this year. High inflation has posed significant challenges to households in the United Kingdom. Many of them have had to make the difficult choice to cut the essential spending because their income can not keep up with inflation.
Yet not all households experience the impacts of inflation the same way. According to the Office for National Statistics, the rising prices for food and non-alcoholic beverages made the largest contribution to high inflation. Sanctions on Russian oil and the rise in the energy price cap, first in October 2021 followed by further rises in April and October 2022, made transport costs and housing and household services other large contributors to inflation. Indeed, their contribution to inflation was more than in May 2022, according to the Office for National Statistics. As a result, households whose large expenditure shares fall in these categories will have suffered the most in this challenging time.
To understand who these households are, we rely on the latest Living Cost Survey which was conducted from April 2019 to March 2020. In this survey, not only do we know the expenditure composition within households but we also have information on their characteristics such as their income and sizes.
This survey helps us to establish a link between household characteristics and expenditure shares. Table 1 reports our results. All the dependent variables, namely the share of food and non-alcoholic beverages, the share of transport costs and the share of housing and household services, and the key explanatory variable, which is income, are in log terms. Therefore, the results reported in Table 1 show the elasticity of expenditure shares to income. In Column 1, we find that low-income households spent more of their total expenditures on food and non-alcoholic beverages. A family whose income was 10 per cent lower than the average would have their expenditure share on food and non- alcoholic higher by around 2 per cent. Column 2 confirms this finding with an elasticity of minus 2.6 per cent. Moreover, this column reveals that larger households would spend more on food and non-alcoholic beverages. In other words, Columns 1 and 2 report that low-income and large families would suffer most from the rising prices of food.
Low-income families also spent a large share of their expenditures on housing services such as energy. Column 3 shows that a family whose income was 10 per cent lower than the average would have an expenditure share on these services higher by 4 per cent. Column 4 provides evidence that agrees with this finding. In addition, it reports that it was the number of children, not the size of the households, would result in a larger expenditure share on housing services.
Finally, Columns 5 and 6 report that affluent and large families spent more on transport costs. With an income that was 10 per cent higher than the average, they would spend more on transport costs by nearly 2 per cent.
To summarize, the latest survey on Living Costs in the UK shows that low-income families would feel the largest strains from the rising prices of food and energy. Hence, the government should provide more financial supports to these families, at least until the end of this year when inflation is expected to rise further.
Table 1: Household expenditures and income
|Food||Food||Housing services||Housing services||Transport|
|Number of Children||-0.063***||0.205***||-0.010|
|Household Size||0.138*** (0.018)||-0.171*** (0.023)||0.054* (0.029)|