The UK’s inflation rate fell unexpectedly to 2.5% in December 2024, down from 2.6% in November, according to the Office for National Statistics (ONS). While this decline offers a glimmer of hope for consumers and policymakers, it doesn’t eliminate the financial pressures faced by many, particularly those relying on universal credit. Let’s explore what inflation means, how it interacts with universal credit payments, and the broader implications of this latest economic development.
What Is Inflation?
Inflation refers to the rate at which the prices of goods and services rise over time, reducing the purchasing power of money. For instance, an inflation rate of 2% means that a basket of goods costing £100 last year would now cost £102.
The UK has experienced significant inflationary fluctuations in recent years. In October 2022, inflation surged to a 41-year high of 11.1%, driven by factors such as global supply chain disruptions, escalating energy costs due to the Russia-Ukraine conflict, and lingering effects of the COVID-19 pandemic.
Though inflation gradually eased to 2% by May 2024, it rebounded slightly in subsequent months. December’s rate of 2.5% indicates continued progress, but the cost of essentials like food and energy remains stubbornly high, keeping pressure on household budgets.
Universal Credit and Inflation: A Disconnect
Universal credit is a vital safety net for millions of low-income households in the UK. Payments are adjusted annually each April based on the inflation rate from the previous September. For April 2025, the increase will be 1.7%, reflecting September 2024’s lower inflation rate.
While this system ensures annual updates to benefits, it creates challenges when inflation rises after the September benchmark. For example, December’s inflation rate of 2.5% means the 1.7% increase in benefits won’t fully cover rising living costs, leaving recipients with a financial shortfall.
This mismatch disproportionately affects low-income households, who spend a larger share of their income on essentials like groceries and energy bills, which have seen sharper price increases.
Challenges on the Horizon
Despite the recent dip in inflation, the road ahead may still be rocky. Several factors could reignite upward price pressures, including:
- Energy Price Caps: Expected adjustments could raise household energy costs.
- Minimum Wage Increases: Higher wages can drive inflation if businesses pass on costs to consumers.
- External Economic Shocks: Events like geopolitical tensions or supply chain disruptions could reverse inflationary trends.
The Bank of England (BoE) has already forecast inflation rising to 2.75% by late 2025, indicating that further economic uncertainty lies ahead.
Expert Perspectives on Reform
Many experts argue that the current method of linking universal credit payments to September’s inflation rate is outdated and inadequate. Iain Porter of the Joseph Rowntree Foundation suggests using December’s inflation rate for a more accurate reflection of cost-of-living changes.
James Smith, a research director at a UK think tank, acknowledged the slight inflation drop but emphasized that the cost of essentials remains a significant burden. Similarly, Danny Sriskandarajah from the New Economics Foundation called for systemic reforms, advocating for increased social security payments funded by higher taxes on the wealthiest.
Without such reforms, low-income households may continue to face mounting financial pressures, even as headline inflation rates fall.
The Need for Systemic Adjustments
While December’s inflation decline to 2.5% marks progress, it isn’t a panacea for everyone. Essential costs remain high, and the universal credit system’s lag in adjusting payments to current inflation exacerbates the struggles of vulnerable households.
Policymakers must address these systemic issues to ensure that benefits keep pace with real-world expenses. In the absence of meaningful reforms, millions of households will remain at risk of financial strain, underscoring the need for a more responsive and equitable safety net.
Why does universal credit adjust based on September’s inflation rate?
The government uses September’s inflation rate to set universal credit adjustments to provide time for planning and implementation before the new rates take effect in April.
How does inflation affect low-income households differently?
Low-income households spend a larger portion of their income on necessities like food and energy, which often experience higher inflation rates, leaving them more vulnerable to price increases.
Why is inflation expected to rise again in 2025?
Factors such as energy price cap changes, wage increases, and external economic shocks could push inflation higher, as predicted by the Bank of England.
