The UK cost of living crisis explained: it’s the period when essentials like energy, food, and housing became markedly more expensive, squeezing household budgets. It matters now because inflation has cooled from its peak, but many bills remain high and interest-rate decisions still shape mortgages, savings, and everyday costs.
What is the UK cost of living crisis?
The “cost of living crisis” is a shorthand for the sharp rise in everyday prices that outpaced many households’ incomes, reducing real purchasing power. In practice, it’s felt through:
- Higher supermarket bills
- Bigger energy costs (gas and electricity)
- Higher borrowing costs (mortgages, loans, credit cards)
- Pressure on rents and housing-related costs
It isn’t a single statistic. But inflation (how quickly prices rise) is a key signal, and the UK’s inflation surge from 2021–2022 is central to why the phrase became widely used.
Background: how the UK got here
Inflation jumped, then eased, then became sticky again
By late 2025, inflation was lower than the peak but still above the Bank of England’s 2% target, with the Commons Library citing 3.2% in November 2025.
Energy became a major transmission channel into household budgets
Energy prices were one of the biggest drivers of the inflation spike, and the pain was amplified because energy is a “must-pay” item for most households. The UK’s regulated energy price cap (for standard variable tariffs) became a headline number because it affects millions of homes.
For context, Ofgem set the price cap for a typical household paying by Direct Debit at £1,758 per year for 1 January to 31 March 2026 (slightly above the prior quarter).
Read our explainer on whether the UK is heading for a recession for more context on how growth risks can affect sterling and markets.
Real wages fell behind prices at the height of the squeeze
When prices rise faster than pay, living standards fall in real terms. The ONS highlighted that in 2022, average wages rose more slowly than prices, meaning many workers needed a larger share of pay to buy the same basket of goods.
Why it matters to UK readers (and why it’s not “over”)
Even when inflation falls, prices rarely drop back to previous levels. Lower inflation often means prices are rising more slowly, not that bills return to 2019–2021 levels.
Three reasons UK households still feel the squeeze:
- High starting point: Essentials rose quickly in 2022–2023
- Borrowing costs stayed elevated for longer: The Bank Rate rose sharply in 2022–2023 and only began falling later.
- Policy “cliff edges”: Some national support schemes ended, leaving a patchwork of targeted and local help.
The UK context: inflation, interest rates, and the Bank of England
How inflation is measured (and why the target matters)
Inflation is typically tracked through CPI/CPIH, measuring how a representative basket of goods and services changes over time. The Bank of England has a 2% inflation target set by the government, designed to keep price rises low and predictable.
Why the Bank Rate affects the cost of living
The Bank Rate is the Bank of England’s main policy lever. It influences:
- Mortgage rates (especially variable rate and new fixed deals)
- Loan and credit costs
- Savings rates (often, but not always)
- Business borrowing and, indirectly, jobs and pay
The Bank Rate peaked at 5.25% (August 2023) and was later cut multiple times; the Bank of England’s database shows it was reduced to 3.75% on 18 December 2025.
The Bank’s own “latest decision” page frames those cuts as reflecting inflation coming down from the peak while still watching pay growth and services inflation.
Benefits and risks: what falling inflation (and rate cuts) can and can’t do
Potential benefits
- Easier pressure on new borrowers: Lower Bank Rate can gradually filter into mortgage pricing.
- More predictable household budgeting: Slower price growth reduces the pace of bill increases.
- Improved sentiment for spending and investment: Lower rates can support demand (though the Bank balances this against inflation risks).
Key risks and trade-offs
- Prices may stay high even as inflation falls: The “level” problem remains.
- Savings returns can decline: Rate cuts can reduce easy-access savings rates over time.
- Some costs are structural: Housing supply constraints, global commodity shocks, and tax/benefit policies can keep pressure on budgets beyond inflation alone.
Real-world UK examples: how the squeeze shows up in daily life
1) Energy bills and the price cap
If you’re on a standard variable tariff, the Ofgem cap effectively sets the maximum unit rates and standing charges suppliers can charge (it’s not a cap on total spend if you use more energy).
2) Food prices and household essentials
ONS data during the peak showed food inflation was a major contributor to headline inflation, alongside housing/household services and transport.
3) Mortgages and refinancing risk
Even for fixed-rate borrowers, the “reset” problem matters: when a fixed deal ends, the new rate reflects today’s market. Bank Rate cuts help, but the pass-through can be slow and varies by lender.
Step-by-step: how the cost of living crisis works (in plain English)
- Global or domestic shocks raise costs (e.g., energy and supply disruptions).
- Companies pass on higher costs through higher prices where they can.
- Inflation rises, reducing what wages can buy unless pay keeps up.
- The Bank of England raises interest rates to cool demand and bring inflation back towards 2%.
- Borrowing becomes more expensive, hitting mortgages and credit, which can reduce spending.
- Inflation falls, but households can still feel squeezed because prices remain higher than before.
Pros and cons: calling it a “crisis.”
Pros (why the term is useful):
- Captures the real-world pressure on essentials
- Highlights the income–price gap (real-terms squeeze),
- Signals that the problem is broader than one bill or one month’s inflation print
Cons (where it can mislead):
- Can imply prices will fall back quickly (they usually don’t)
- Can hide uneven impacts (different households face different exposures to energy, rent, and debt)
- Risks turning a complex mix of causes into a single narrative
Comparisons (UK-focused): why some households feel it more than others
- Renters vs owners: Renters often face faster pass-through from higher interest rates via landlord costs and market rents, while owners feel it directly through mortgage repricing.
- Variable-rate vs fixed-rate mortgages: Variable-rate borrowers feel Bank Rate moves quickly; fixed-rate borrowers feel it at renewal.
- Low-income vs higher-income households: Lower-income households typically spend a larger share on essentials like energy and food, so inflation in those categories hits harder.
Best practices: what to do if you’re trying to reduce pressure
- Audit essentials first: energy, housing, food, transport
- Check your tariff and usage: if you’re on a standard variable tariff, understand how the price cap works and whether switching makes sense (watch exit fees on fixed deals).
- Use benefit and support checkers: even if national cost-of-living payments ended, there may be other help available
- Plan ahead for mortgage renewals: start comparing deals months before your fixed rate ends; consider fees vs rate trade-offs
- Build a buffer: even small monthly savings can reduce reliance on high-cost credit
Key insights (the newsroom view)
- The cost-of-living crisis was driven by a rapid inflation shock, with energy and food central to the surge.
- Inflation is lower than the 2022 peak, but the UK entered late 2025 still above target.
- Interest rates have fallen meaningfully since 2024, which may ease some borrowing costs, but the “price level” challenge remains for household budgets.
Table: UK cost of living crisis timeline (high-level)
| Period | What happened | Why it mattered to households | Key numbers |
|---|---|---|---|
| Early 2021 → Oct 2022 | Inflation surged | Essentials rose quickly; budgets squeezed | CPI peaked at 11.1% (Oct 2022) |
| 2022–2024 | Targeted support expanded then tapered | Helped offset bills for some; confusion about eligibility | Multiple payments made (2022–2024) |
| 2022–2023 | Bank Rate rose rapidly | Mortgages and credit became more expensive | Targeted support expanded, then tapered |
| 2024–2025 | Targeted support expanded, then tapered | Pressure eased, but bills stayed high vs pre-crisis | 3.2% (Nov 2025) |
| Late 2024 → Dec 2025 | Rate cuts began | Gradual relief for borrowers; potential lower savings rates | Bank Rate 3.75% (18 Dec 2025) |
| Jan–Mar 2026 | Price cap updated | Energy remains a major budget line | Inflation fell, then stayed above target |
Useful Tips Section (practical, real-world)
- If your fixed mortgage deal ends in 2026, start shopping early and compare the total cost (rate + fees), not just the headline rate.
- If you’re on a standard variable energy tariff, track your usage and check whether a fixed deal genuinely saves money after exit fees.
- If your budget is tight, prioritise a “survival buffer”: even £10–£25 per week can reduce reliance on overdrafts or high-cost credit.
- Beware scams: official payments and benefits decisions have set processes, and you should use official sources if a message looks suspicious.
FAQ (People Also Ask style)
1) Living cost crisis UK: what does it actually mean?
It means the cost of everyday essentials rose faster than many incomes, particularly during the 2021–2023 inflation surge, reducing what households could afford.
2) The cost of living crisis facts: what were the main drivers?
Energy and food price rises were major contributors, alongside housing-related costs and broader inflation pressures.
3) UK cost of living crisis summary: Is it easing now?
Inflation is lower than the 2022 peak, but the latest data still shows prices rising and many costs remaining elevated compared with pre-crisis levels.
4) UK cost of living crisis timeline: when did it peak?
Inflation peaked in October 2022 at 11.1% (CPI). Household pressure peaked around the period of sharp energy and food price rises and rapidly increasing interest rates.
5) Are there still national cost-of-living payments?
The GOV.UK guidance notes that DWP is not planning to make any more Cost of Living Payments (the scheme covered 2022–2024 eligibility windows).
6) How do interest rates connect to the cost of living?
Higher interest rates raise borrowing costs (mortgages, loans) and can cool spending to bring inflation down; lower rates can reduce borrowing costs over time, but may also reduce savings returns.
7) Does the energy price cap mean my bill can’t go above £1,758?
Not exactly. The cap limits unit rates and standing charges for a “typical” household. If you use more energy than typical, your total bill can be higher.
Conclusion
The UK cost of living crisis explained in one line: a sharp inflation shock led by energy and food hit household budgets, and higher interest rates added pressure through mortgages and credit. Inflation has cooled from the 2022 peak and rates have fallen since 2024, but many costs remain structurally higher, so the squeeze hasn’t vanished for everyone.
What to watch next: monthly inflation prints, Ofgem cap updates, and the Bank of England’s rate path because together they shape the pace of relief (or renewed pressure) on UK household finances.
Read our explainer on whether the UK is heading for a recession for more context on how growth risks can affect sterling and markets.
