The Impact Of Falling Inflation On Universal Credit Payments – What You Need To Know

UK inflation unexpectedly dipped to 2.5% in December 2024, down from 2.6% in November, according to the Office for National Statistics (ONS). This slight decrease brings some relief to consumers and the government, but challenges remain for those relying on universal credit. Let’s look into what inflation is, how it impacts universal credit payments, and why the fall in inflation may not ease pressures for everyone.

Inflation

Inflation measures how much the general price level of goods and services rises over time. For example, if inflation is 2%, a basket of groceries that cost £100 last year would now cost £102.

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The UK has seen significant inflationary changes recently. In October 2022, inflation surged to a 41-year high of 11.1%, driven by global supply chain issues, rising energy prices from the Russia-Ukraine conflict, and COVID-19’s economic aftershocks. Over time, inflation has eased, dropping to 2% in May 2024, before rebounding slightly.

December 2024’s inflation rate of 2.5% marks progress, but essential costs like food and energy remain elevated. The Bank of England (BoE) continues to adjust interest rates to achieve its 2% inflation target.

Universal Credit

Universal credit payments are adjusted annually each April, based on inflation data from the previous September. For April 2025, the increase will be set at 1.7%, reflecting September 2024’s lower inflation. However, this method leaves recipients struggling when prices rise after September, as benefits don’t adjust again until the following April.

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Although inflation dropped to 2.5% in December, the 1.7% increase in benefits won’t fully cover the ongoing rise in living costs. Essential expenses like energy bills and groceries remain high, disproportionately affecting low-income households.

Pressures Ahead

While the December inflation rate offers a glimmer of hope, experts predict potential challenges ahead. Rising energy price caps, an increase in the national minimum wage, and external economic factors could cause inflation to climb in 2025.

Paul Johnson, director of the Institute for Fiscal Studies (IFS), cautioned against assuming inflation will consistently fall, noting that energy price rebounds or significant wage increases could reverse the trend. The Bank of England has also forecast inflation rising to 2.75% in late 2025, indicating further uncertainty.

Expert Opinions

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Advocates for low-income households emphasize the flaws in using September inflation to determine universal credit adjustments. Iain Porter from the Joseph Rowntree Foundation highlighted the limitations of this system, suggesting the government could instead use December’s inflation rate for more accurate adjustments.

James Smith, a research director at a UK think tank, acknowledged the slight inflation decrease but warned that living costs remain a significant burden. Essentials like food and utilities, which have risen disproportionately, continue to strain household budgets.

Danny Sriskandarajah, head of the New Economics Foundation, emphasized that millions of people are still struggling to afford basics. He advocates for boosting incomes through social security and taxing the wealthiest to fund such measures.

For those relying on universal credit, the system’s inability to keep pace with inflation highlights the need for reform. Without changes, recipients face ongoing challenges in covering essential costs.

Although the latest inflation drop is a step in the right direction, it’s not a solution for everyone. With rising costs looming, universal credit recipients may continue to face financial strain unless systemic adjustments are made.

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