UK GDP was up 0.4% in Q2 of this year following a 0.6% increase in Q1. These figures are up around 1% from the same quarter in 2025. Q3 has followed some similar trends, however we are getting into budget season. The new Prime Minister is concerned about the government’s borrowing as inflation has led to higher government bond yields, which increases the cost of servicing the debt. It also continues to create cost of living pressures on consumers. Easing the cost of living crisis is a key target for the new Prime Minister. The government is also under increasing pressure to spend more on defence.
Inflation in the UK has increased this quarter. In July CPI was 2.9% and in August it was 3.1%. The UK targets 2% inflation and these numbers are still slightly high relative to the target. However, it has been widely discussed that inflation and interest rates will remain elevated. 3% inflation is high, but maybe not excessive, so why does it feel like the cost of living has got out of control?
3% seems reasonable, but these are year-on-year numbers. When you zoom out you can get a bigger picture of inflation for the past few years. I’ve chosen 2020, which seems like a lifetime ago but is only 6 years. Between 2020 and August 2026 UK inflation has been 31.9% cumulatively, with an average annual inflation of 4.29%.
Considering in that period we have had Covid, the Russia-Ukraine war, the Middle East conflict and the UK has had five Prime Ministers, a 4.29% a year inflation again seems reasonable. But as we all know inflation is calculated from a basket of goods, and if you only use certain parts of the basket you might feel better or worse off.
Energy is something we all use and has been a key concern given the conflicts going on. Its been volatile since 2022 when Russia invaded Ukraine but calmed until the Middle East conflict this year. A research briefing posted by the UK parliament think the increase in the October 2026 cap will mean domestic energy bills will be 58% above the winter 2021 levels. That’s well above the headline inflation number.
Motor fuel is only around 1.5% of CPI, but petrol has gone up nearly 30% in the last six years and for unfortunate diesel drivers it has gone up 41.9% in the last six years. Now I don’t own a car so for me I wouldn’t have felt that, but for those who rely on driving to work etc then it will have impacted how much they are spending.
Food and drinks are around 14% of CPI (both alcoholic and non-alcoholic). This is where I think most people have felt costs go up. UK food prices have gone up nearly 40% since 2020. That’s quite a big difference to the quoted CPI number.
But it is not just the cost of food which has gone up, we’ve experienced and are experiencing shrinkflation in our supermarket aisles. I remember the good old days of buying a 500g tub of Lurpak spreadable, which is now unfortunately only 400g and contains rapeseed oil. The same can be said for Cadburys Dairy Milk. It now no longer contains enough cocoa to legally be called chocolate in Europe, but holds just the minimum for the UK standards. The same cannot be said for our “chocolate” biscuits like Penguins and Clubs which were recently forced to rebrand as changes to the recipe took them below the threshold.
It is not just in the shops. If you are out at the pub, you will notice the difference there too. Pints have gone up 36% in just four years, which is about £1.50 more per pint. But it is not just alcoholic drinks. The average London pint costs around £6.50, while the average cost of a Guinness zero is £6, so only 50p difference. If you get a can, it’s a bit cheaper at £5.
It is not just impacting your wallet. You are also experiencing drinkflation here too. You might notice some alcohol percentages have gone down. The most quoted one is Carling Original which has reduced in strength from 4% to 3.4%. This is mostly due to the saving in alcohol duty the alcohol companies have to pay depending on strength. All are looking for cost savings to increase margins on the pints or cans you buy.
The difficulties these numbers create can be seen in the statistic that on average two pubs are closing every day in the UK according to the British Beer and Pub Association. The Prime Minister has already announced a 20% reduction in business rates for pubs as well as other small policies like capping single bus fares at £2 and removing 5% VAT on domestic electricity bills. All intended to ease some of the cost of living burdens, and we might see more in the budget in a months time.
Many fund managers and macro analysts we have spoken to over the past few years have said inflation would remain sticky for a while and that we wouldn’t be going back to a 2% inflation and very low interest rate environment. Headline inflation has been around 3% which is higher than we are used to but not out of control, when you look under the bonnet you begin to see that most of the population will be experiencing a higher percentage of inflation and that the cost of living maybe has got out of control.
Emily Cave – Research Analyst
FPC26773
All charts and data sourced from FactSet
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