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How the cost of living crisis is impacting some cities more than others

There is a clear North-South divide in the current cost of living crisis. This is partially explained by lower income levels outside the South of England but there are also local factors driving this.

Blog post published on 14 July 2022 by Valentine Quinio and Guilherme Rodrigues

From one crisis to another: just as the UK emerged from the economic damage inflicted by the pandemic in the past two years, it lurched straight into a new cost of living crisis. At the national level, there is a clear understanding of the scale of the problem: inflation is reaching a 40-year record high level. But how is the pressure on costs and squeeze on incomes playing out across places? Centre for Cities’ latest report investigates the geography of the cost of living crisis- here’s a summary of what it says.

Inflation is significantly higher in Northern cities

City-level inflation estimates, developed for the first time by Centre for Cities, show that no corner of the country is sheltered from soaring costs but some places are hit harder than others. It is the UK’s poorest cities, those that are the least able to cope with a new crisis, that are bearing the brunt.

There is a clear geography to this, as many of these hard-hit places are located in the North, Midlands and Wales. Burnley, Blackburn and Blackpool are the three places where prices have increased the most, with inflation between 11 and 11.5 per cent in May 2022. This is nearly 3 percentage points higher than in southern cities like London, Reading and Cambridge.

Figure 1: There is a North-South inflation divide

Source: ONS; Beauclair; EPC Certificate, HMRC (PAYE), Centre for Cities’ calculations.

Exposure to energy and petrol prices explains the differences between places

The reason why cities in the North are hit harder has to do with their consumption and spending patterns – many of them are much more exposed to energy and petrol, which have by far the highest inflation rate. But why is that the case?

The first explanation is the nature and quality of the housing stock. Energy demand, and therefore bills, depend on the energy efficiency of a dwelling and the leakiest, least-insulated stock tends to be concentrated in the North. In Burnley, for instance, around 75 per cent of housing stock is below EPC band C, against less than 50 per cent in Milton Keynes. The result is that average energy bills are estimated to be, on average, £400 pounds higher in Burnley than in Milton Keynes.

The second is car usage. Cities where households are more reliant on cars to get around are more exposed to increases in fuel prices, particularly when they drive longer distances. Households in places like Burnley and Blackburn both tend to commute more by car and for longer distances, compared to places like London and Cambridge where more people use public transport or active travel. The result is that in these northern cities, people are more exposed to increases in fuel prices.

The third explanation is related to income levels. Poorer households earn less, but heating their homes or driving their cars costs the same (or more as suggested above). The result is that these items take up a larger share of spending (as people have less money to spend on non-essentials such as eating and drinking out).

These patterns are very concerning given the expected trajectory of fuel and energy costs. When, for example, the energy price cap is lifted in October, on average it will be households in cities and large towns in the North of England that will be most affected.

Wages aren’t keeping up with inflation

Inflation is only one part of the story. The other side of the coin is wages: when prices grow faster than nominal wages, consumer spending power is squeezed.

Wage growth has failed to keep up with inflation in all 63 cities and large towns. The result is that real wages have fallen everywhere when compared to April 2021. Here again, there is a geography: many of the places where inflation and wages diverge the most (with inflation rising much faster than wages) tend to be in the North. In Burnley and Blackpool, real wages fell by 7 per cent, against 3 per cent in Milton Keynes and London.

Concretely, in monetary terms, we estimate that inflation is leaving workers in the North, Midlands and Wales nearly £340 a year poorer than in the South.

Figure 2: Cities in the poorest areas are the ones where real wages declined the most

Source: ONS; Beauclair; EPC Certificate, HMRC (PAYE), Centre for Cities’ calculations.

What does that mean for policy?

The support the Government has already introduced to deal with rising utility bills is welcome and the geography of the support is broadly right, but the scale is not. This is mainly because it’s not directly targeting those living in poorly-insulated housing, where energy bills are likely to increase the most. Our analysis shows that in most places (47 out of 58), net energy bills (on average) are still likely to increase even after considering the recent £15bn support package.

Figure 3: The cost of living package in most cities is estimated to be below the increasing energy costs

Source: ONS; Beauclair; DWP; EPC Certificate; HMRC (PAYE); Centre for Cities’ calculations. Methodology: Estimated share of residents receiving benefits or pensions uses November 2021 DWP data, divided by the most recent population figures from ONS (2020). The increase in annual energy costs is calculated to increase by 54 per cent between April 2022 and September 2022 and by 40 per cent between October 2022 and March 2023 based on Ofgem statements.

This calls for a number of immediate policy interventions:

In the short-term, Government should support immediate needs, especially for households with lower income. Benefits should be increased in line with inflation now, instead of April 2023; and the £20 Universal Credit uplift should be reintroduced to shelter lower-income individuals, who are more likely to face higher inflation. On top of that, a varying one-off payment, depending on the existing energy grade of the dwelling, should be introduced for households living in inefficient houses (below EPC grade C).

The current cost of living crisis highlights that long-term interventions are important to shelter the population against similar shocks in the future. Given this, the Government should accelerate the retrofit agenda – which would reduce energy demand and bills – by reintroducing the Green Homes Grant Scheme and bringing forward the Future Homes Standards regulation.

The biggest long-term challenge though is to get the economy to grow, especially in places in the North. This of course is the aim of the Government’s levelling up agenda – now we need a serious policy package to achieve it.