Good evening from New Economy Brief.
Next week will be four years since Russia’s invasion of Ukraine sent energy prices skyrocketing, combining with other factors to accelerate a long-building cost of living crisis. Inflation peaked at 11.1% in October 2022, and despite falling since it remains at 3% – significantly above the Bank of England’s 2% target. New polling for the Cost of Living Action campaign has found that almost two thirds of the UK public still consider this one of the three most important issues facing them personally. A similar number say it has made them cut back on essentials, and 40% have £100 or less left at the end of each month after bills and essentials.
It’s clear that for millions of people the cost of living crisis hasn’t gone away. This week’s New Economy Brief digs into why, and how the government can respond.
Energy
The government has estimated that 9 million households in England could be considered ‘fuel poor’ in 2024, almost double the 2021 total. Here, this means they need to spend more than 10% of their income on energy to heat their homes sufficiently. This is much higher than the official figure of 2.73 million households in England, which controversially measures fuel poverty more narrowly.
Scotland and Wales both still use the 10% definition in their official metrics, with 861,000 and 340,000 fuel-poor households respectively. This means around 30% of all UK households are in fuel poverty.
A driving factor for this high number is, unsurprisingly, the continuing high price of energy. The average annual household bill for gas and electricity in early 2026 is £1758 – below the October 2022-June 2023 peak of £2380 but still 44% higher than before Russia’s invasion. Why have bills stayed so high?
Reliance on gas. The first reason is the UK’s reliance on gas imports for power plants and heating homes. Gas prices shot up in the wake of the Russian invasion, and because the price of electricity in the UK is dictated by whatever is the most expensive source of generation needed to meet demand, expensive gas has translated directly into expensive electricity – even when other sources of electricity generation, including renewables, have been cheaper. This ‘marginal pricing’ system means that the UK’s electricity market price is set by gas 98% of the time – way above the EU average of 39%. Partly because high electricity prices disincentivise adoption, the UK has the slowest heat pump rollout in Europe, leaving us highly dependent on gas for home heating.
Privatisation and profiteering. Another major issue is privatisation. Compared to other European countries, the UK lacks publicly owned energy infrastructure. As Common Wealth analysis shows, this has led to high profits and wealth extraction along the UK’s energy supply chain. In countries with public energy systems, prices are 20-30% lower. Meanwhile in the UK, private companies paid out at least £70.7bn in dividends between 2010 and 2025 - money that could have gone directly into infrastructure investment or cheaper bills.
Incomes
Wage stagnation. Another key cause of the cost of living crisis is low incomes – driven by both wages and the social security system. Long before the energy price spike, the UK was in the grip of persistent wage stagnation. In 2024, the Resolution Foundation calculated that average wages were only £16 a week higher in real terms than in 2010. And while other rich countries have also experienced low wage growth, the UK has suffered particularly badly. If UK wages had risen at US or German rates, average pay here would be £3,600 a year higher. Back in 2023, TUC analysis showed that real wages would not return to 2008 levels until 2028.
The TUC had already labelled 2022 the worst year for real wage growth for almost 50 years, as pay failed to keep pace with spiralling inflation. And while real earnings growth did return in 2023, it has slowed again. Importantly, even this growth was not shared equally: analysis by the Joseph Rowntree Foundation (JRF) shows that average real earnings have actually been falling for the bottom 40% of households.
A threadbare social security system. Last year the government abolished the two child limit, which restricted financial support via the benefits system to a household’s first two children. This will lift 450,000 children out of poverty by 2030, but after years of cuts and freezes the basic rate of Universal Credit remains painfully low – just £400.14 a month for single adults over 25. This is around its lowest ever level as a proportion of average earnings, and far below the £120 a week minimum needed to afford essentials, according to JRF.
Housing
The nightmare of private renting. Unfortunately for the 20% of people in the UK living in the private rented sector (PRS), rents are now at record highs. They consume 44% of the average wage, up from 40% five years ago and way above the 30% the Office for National Statistics considers affordable.
To make matters worse for low-income private renters, repeated freezes to Local Housing Allowance (LHA) means the gap between financial support and the actual cost of renting keeps getting wider. The Resolution Foundation estimates the monthly shortfall is £104 a month for a typical two-bed property, rising to £180 a month by 2029/30 unless the government increases LHA.
The government’s flagship Renters’ Rights Act, which received Royal Assent in October last year, also includes very limited measures to tackle the affordability crisis, with renters’ union ACORN calling it “the key area missing from the Act.”
Social housing shortage. 2024 analysis by Shelter found that social rents are 64% more affordable than private rents, costing tenants £828 less on average per month. But a lack of social housing is trapping families in the more expensive PRS. There were 336,366 families awaiting social housing in London alone last year – a ten-year high.
How to end this crisis
The cost of living crisis has multiple drivers, and that means multiple solutions are needed to tackle it.
Nationalising the energy distribution network would eliminate the high profit margins associated with the current model of private ownership. Going further, there may be room to build the role of GB Energy as a publicly-owned generator, removing the profits that add to bills in other parts of the system - such as the gas power plant profits worth £120 per household. More effective price caps on energy bills would also provide immediate relief to consumers, with suppliers required to offer a standardised tier or sliding price structure.
An 'essentials guarantee' in Universal Credit would enshrine in legislation a minimum level of support from the social security system that is based on the actual cost of essentials. Fair Pay Agreements, which we covered back in September 2025, would also set minimum pay and improve working conditions, especially important in low-paid sectors like retail and hospitality.
The government has committed to building more social housing, recognising the “chronic shortage of affordable, and in particular social rented, homes.” Ramping up its Affordable Homes Programme would not only provide much needed social housing, but also generate billions in economic benefits over the longer term. In the short term, realigning LHA with the actual cost of renting would provide much needed support for low-income private renters. And rent controls – which although sometimes dividing opinion – can, if designed carefully, reduce rents effectively without affecting supply.
The good news for the government is that the Cost of Living Action campaign found that all these solutions are supported by a majority of the public, including both a majority of people intending to vote Labour at the next general election and the majority of people intending to vote for Reform.
The cost of living crisis hasn’t gone away, and it will remain the number one issue for the public until the government tackles it comprehensively. There are plenty of potential policies on the table; the one option that won’t work is inaction.
Second and holiday home taxes working. Early analysis by Generation Rent has found that newly implemented taxes on second and holiday homes are having the desired effect. With owners no longer able to deduct mortgage interest from taxable income, and council tax surcharges on second homes introduced in around 70% of local authorities, the haemorrhaging of homes into holiday lets that we have seen over the past decade has slowed nationally. However, London has been bucking the trend, with six of the eight highest increases in rates of holiday homes in 2025 seen in London boroughs.
Public fury at exploitative business. Polling undertaken by the Fairness Foundation has found that the British public strongly oppose business models they see as extractive. Particular anger is reserved for business models that are understood to exploit consumers, workers or society more broadly, including those that avoid tax or rip off consumers.
Majority of children now living under the minimum income standard. For the first time, more than half of children in the UK are living below the minimum income standard, as set out by the JRF. The report also finds that the proportion of the public living under this threshold has also reached its all-time peak at 37.5%.
Temperatures rising. Economist James Meadway argues in the New Statesman that Britain is getting both poorer and angrier. He cites the current student loans debate, sparked by the finding that two thirds of graduates are not even meeting the interest threshold on their loans, as the latest example of a system that is perceived to be failing those it serves and underlies anger across the country.
