What does ‘cost of living’ actually mean and how is it calculated?

The UK is currently in a cost of living crisis (Picture: Getty)

The term ‘cost of living’ has been used in abundance over the last few months, as the UK’s economy recovers from the effects of the pandemic and the Ukraine war.

The cost of living crisis is talked about every night on the news and is mentioned in countless TV adverts.

But what exactly does ‘cost of living’ mean, and how is it calculated?

Here’s all you need to know.

What does ‘cost of living’ mean?

The cost of living is the amount of money needed to cover basic expenses such as rent, food, energy bills, clothing and to maintain a decent standard of living.

The price of your weekly shop is one of the aspects of the cost of living (Picture: Shutterstock / Paul Cowan)

In places where the cost of living is at its highest, people usually receive higher wages.

For example, London is very expensive to live in, but it is home to many high paying jobs.

The ‘cost of living crisis’ that the UK is currently facing, refers to the fall in disposable incomes that people in the UK have experienced since late 2021 due to high inflation outstripping wage increases.

How is the cost of living calculated?

Inflation is at its highest level for 40 years (Picture: Getty)

The cost of living is calculated using the rate of inflation – which currently stands at its highest rate in over 40 years.

Inflation is the increase in prices of goods and services over time.

For example, if a loaf of bread costs £1 and then costs £1.07 the next year, inflation is at 7%.

The Office for National Statistics calculates the rate of inflation by keeping track of how much one hundred every day goods and services – such as rent and groceries-known as the ‘basket of goods’ cost.

Each month’s inflation figures show how much the price of items has risen since the same date last year.

The latest data shows that inflation was at 11.1% in October, up from 10.1% in September – the highest rate since October 1981.

Many employers say it is unaffordable for them to raise wages in line with inflation, meaning that people are forced to spend a higher portion of their earnings on basic necessities and thus have a higher cost of living.

Why is the cost of living rising so rapidly?

The cost of energy is a key reason why things are getting more expensive.

The price of oil and gas increased following the pandemic due to higher demand as life got back to normal.

The war in Ukraine helped to exacerbate this as less energy became available from Russia – causing prices to rice even further.

The war also caused food prices to rise as less grain became available from Ukraine, known as the breadbasket of Europe.

Which everyday products have faced the biggest price hikes?

According to ONS data, the price of low-fat milk rose by a whopping 47.9% from October 2021 to October 2022.

The data also shows that the price of margarine has risen by 42.1% and the price of pasta has risen by 34%.

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The cost of living in the UK has risen rapidly over 2022