UK Mortgage Holders and Renters Face Steepest Inflation Impact

The surge in living costs across the United Kingdom has had an uneven impact on various segments of society, with mortgage holders and renters bearing the brunt of the inflation, according to data from the Office for National Statistics (ONS). The figures underscore the challenges faced by the government in assisting struggling households.

In the 12 months leading up to June, household costs for those with mortgages rose at an annual rate of 3.7 per cent, down from 4.1 per cent in May but still the highest among all UK socio-economic groups. This rate significantly surpasses the 2.5 per cent experienced by the general population and the headline inflation of 2 per cent in June. Similarly, households in private rental accommodation saw their costs increase by 3.2 per cent during the same period.

Conversely, homeowners who own their properties outright experienced the lowest cost increase at 1.3 per cent. This disparity highlights the varying impact of the cost of living crisis on different segments of society.

The ONS data provides a more accurate representation of households’ living costs compared to the headline inflation index, as it considers the specific spending patterns of different household types and includes costs related to mortgage interest rates and property purchases.

The steep rise in mortgage costs since late 2021 can be attributed to the Bank of England’s decision to raise interest rates from a record low of 0.1 per cent to a 16-year high of 5.25 per cent last summer to combat high inflation. Although the central bank recently reduced its benchmark rate to 5 per cent, the first cut since the onset of the Covid-19 pandemic, financial markets anticipate another reduction in November.

Tomasz Wieladek, chief European economist at T Rowe Price, noted that the ONS data reveals the impact of the Bank of England’s monetary policy on household disposable income, which is not reflected in consumer price inflation.

The higher inflation rate experienced by renters compared to the general population can be partly attributed to landlords with mortgages passing on their increased borrowing costs to tenants, coupled with a shortage of available properties driving up rental prices.

Despite the ongoing challenges, there are signs of an easing in the cost of living, with the annual growth in household costs slowing to 2.5 per cent in June from a peak of 12.7 per cent in October 2022. This can be attributed to falling energy and food costs, which had previously surged following Russia’s full-scale invasion of Ukraine in February 2022.

The impact of fluctuating energy costs is particularly evident among retired households, who allocate a larger portion of their income to gas and electricity bills. The inflation rate for retired households stood at 1.2 per cent in June, down from 1.4 per cent in May and a peak of 14.3 per cent in October 2022.

The combination of high mortgage costs and falling energy prices has also widened the inflation gap between richer and poorer households. The wealthiest 10 per cent of the population faced an inflation rate of 3.3 per cent in the year to June, while costs for the poorest 10 per cent rose by 1.7 per cent, according to the ONS.

As the government grapples with the cost of living crisis, Prime Minister Sir Keir Starmer faces the challenge of delivering on his promise of a “decade of national renewal.” Ministers are currently engaging with energy company executives to discuss plans for the winter and are expected to extend a critical hardship fund to support struggling households in England.