‘Worst inflation in a generation’ dominated household budgets in 2023

Which? head of food policy Sue Davies said: “We’ve seen the worst inflation in a generation in 2023 and while the rate at which prices are going up is slowing, food prices are still unbearably high for many.

“As a category, butters and spreads now cost less than this time last year, however, the prices of everyday essentials may never return to the prices shoppers were used to before the cost-of-living crisis began.

“Budget range products remain the cheapest items on supermarket shelves but may not be accessible to those who rely on more expensive convenience stores.

“This is why we’ve been calling for supermarkets to help those who are struggling by making sure affordable food is available in smaller branches.”

Likewise, households endured yet another year of energy bill misery as the ongoing effects of the pandemic and Russia’s invasion of Ukraine highlighted the UK’s susceptibility to the highly volatile wholesale market.

The year started with Ofgem’s energy price cap rocketing to more than £4,000 a year for the typical household, although households received £400 towards their bills, which were limited by the Government’s energy price guarantee to an average £2,500.

Bills have dropped since then, but the price cap will rise slightly again to just over £1,900 from January 1 – still significantly higher than before the energy crisis began.

Headline inflation has dropped back, with an unexpectedly sharp fall to its lowest level for more than two years last month, reinforcing forecasts for the Bank of England to start cutting interest rates early in 2024.

Official figures showed falling fuel prices and another drop in food inflation – helped by falls in bread and cereals where prices dropped 0.8% on the month compared with a rise of 1.9% a year ago – drove the Consumer Prices Index (CPI) down to 3.9% in November from 4.6% in October, and the lowest level since September 2021.

It marked another dramatic decline after inflation dropped from 6.7% in September to 4.6% in October, which led to Prime Minister Rishi Sunak declaring an early victory in his goal to halve inflation by the year end.

But the Bank has been quick to warn recently that the job of bringing inflation back to its 2% target is far from done and it has poured cold water on speculation over an imminent interest rate cut.

The situation could also change rapidly – a spike in fuel prices or strong growth in wages could still lead to a rate rise. Similarly, if the economy looked to be weakening, a rate cut could materialise sooner than anticipated.

There is also the suggestion that headline inflation may increase slightly early in the new year as the CPI basket is re-weighted and the household energy price cap is increased by 5% from January 1.

Balwinder Dhoot, director of sustainability and growth at the Food and Drink Federation, said: “While agricultural commodity prices are generally falling, they remain 21% higher than they were pre-pandemic.

“There have been significant price rises in cocoa – reaching a 25-year high, while olive oil prices are almost double than a year ago.

“The recent navigation turmoil in the Red Sea will likely add to inflationary pressures on our sector, with global shipping rates increasing by 10% since the start of the month.”

Andrew Goodacre, chief executive of the British Independent Retailers Association (Bira), said: “While optimism usually accompanies a new year, we anticipate 2024 to be another challenging period given the prevailing pessimism in economic growth.

“We expect inflation to stabilise, and interest rates to remain where they are. Economic stability is crucial for us to focus on economic recovery.”

Mr Goodacre added that consumer confidence remained key, and that a general election would inevitably lead to a period of instability.

He said: “Consumers will still lack confidence and will be looking for value and strong brands. We are committed to supporting our members in meeting evolving consumer preferences, ensuring they remain competitive in the market.”

Jack Meaning, chief UK economist at Barclays, said: “Although 2024 will be a tough year for the economy as a whole, the new year is a time to look for the positives.

“We expect to see the Bank of England start easing interest rates from the middle of the year, and in fact, we’re already seeing mortgage rates come down in anticipation.

“This is as the speed of price rises slows, which should continue to provide at least some boost to the spending power of people who have been squeezed through the cost-of-living crisis.

“2024 will be a year of transition, from headwinds to tailwinds, but come next December we should be able to toast the new year with more festive spirit.”