TL;DR: The UK cost-of-living squeeze is easing in some areas, but it is far from over. CPI inflation fell to 2.6% in June 2026, yet Ofgem’s typical household energy price cap jumped 13% to £1,862 for July to September. Prime Minister Andy Burnham has announced measures including removing 5% VAT from domestic electricity and a £2 bus fare cap, but he has also acknowledged that the government may need to do more. The uncomfortable truth is that slowing inflation does not reverse the huge price increases households have already absorbed.
Inflation is falling. The economy has grown. Food inflation has cooled. On paper, the cost-of-living crisis should be starting to feel less painful.
Except for millions of households, it does not.
That is the problem facing the new government. Andy Burnham has started rolling out what are being described as practical, everyday measures to reduce household costs. But he has also admitted the obvious: the help announced so far may not be enough.
Energy bills are the clearest reason people still feel squeezed
From 1 July to 30 September 2026, Ofgem’s energy price cap for a typical dual-fuel household paying by Direct Debit is £1,862 a year. That is 13% higher than the previous cap period.
The price cap is not a maximum annual bill. It limits the rates suppliers can charge customers on standard variable tariffs. Use more energy and you pay more. Use less and you pay less.
The average electricity unit rate for a Direct Debit customer under the current cap is 26.11p per kWh, with an average standing charge of 57.19p a day. That is why relatively modest government interventions can still matter when multiplied across an entire year.
The government is removing VAT from domestic electricity
One of Burnham’s first cost-of-living announcements was to remove the 5% VAT currently charged on domestic electricity. The change is due to take effect from 1 October 2026.
That should reduce electricity bills, but it is important to keep the saving in perspective. Recent estimates put the benefit for a typical household at roughly £45 a year. Helpful? Yes. Transformational? No.
Saving £40 or £50 matters when money is tight. But it does not undo years of higher food, rent, mortgage and energy costs.
That distinction is important because politicians often talk about inflation falling as though prices are falling. They are not necessarily falling. A lower inflation rate usually means prices are still increasing, just more slowly.
Inflation at 2.6% does not mean the crisis is over
ONS figures show CPI inflation fell to 2.6% in the 12 months to June 2026, down from 2.8% in May. CPIH, which includes owner occupiers’ housing costs, fell from 3.0% to 2.8%.
Transport and food made some of the largest downward contributions. There was also encouraging news on supermarket prices: Reuters reported UK food inflation had fallen to around 1.7% in June, helped by intense supermarket competition and consumers resisting further price rises.
But households do not experience inflation as an annual percentage on a spreadsheet. They experience the accumulated price level. If something went from £100 to £120 during the inflation shock and then rises another 2.6%, it does not magically return to £100. It becomes more expensive again, just at a slower rate.
What has actually been announced?
| Measure | What it means | Timing |
|---|---|---|
| 5% VAT removed from domestic electricity | Reduces electricity costs, with typical savings estimated around £45 a year | From 1 Oct 2026 |
| £2 bus fare cap | Limits eligible single bus fares and targets commuting costs | From Jan 2027 |
| Business cost measures | Government says it will look at pressures including business rates | Further detail expected |
| Further household support | Burnham has acknowledged more may be needed | Not yet confirmed |
The government has deliberately started with relatively simple measures that can be understood quickly. Cheaper electricity. Cheaper buses. Pressure on everyday household and business costs.
The political attraction is obvious. People can immediately understand what a £2 bus fare means. They can understand VAT disappearing from an electricity bill. The problem is scale.
Why £45 off an electricity bill may not feel like much
A household facing a £1,862 typical energy cap is unlikely to feel financially transformed by a saving of roughly £45. That does not make the policy pointless. It means the policy needs to be judged as one part of a much bigger household budget.
Housing costs remain a major pressure. Renters have seen substantial rent increases over recent years. Mortgage borrowers refinancing from old ultra-low fixed rates can still face a large jump in monthly payments. Council tax, insurance and utilities have also risen.
That is why the cost-of-living debate has moved beyond headline inflation. The issue is now affordability: how much income is left after unavoidable bills?
There are already calls for much bigger energy support
The Resolution Foundation has argued for an emergency winter package that could reduce energy bills by as much as £175 for lower-income households. Its proposal would target households where the highest earner makes £24,000 or less and could cover around 40% of UK households.
That proposal is not government policy. But it illustrates the scale of the debate now taking place ahead of winter and the October Budget.
The case for targeted support is straightforward: £50 means far more to a household already choosing between heating and food than it does to a high-income household. The difficult part is designing support that reaches the right people without creating enormous administrative costs or cliff edges.
The economy can improve while households still feel worse off
Fresh ONS data released on 13 August showed the UK economy grew by 0.3% in June and 0.4% across the second quarter of 2026. That is better than many expected.
But GDP growth and household financial comfort are not the same thing. An economy can grow while individual families remain under pressure from housing, energy and debt costs. Likewise, inflation can fall while the overall cost of essentials remains painfully high.
The cost-of-living crisis does not end when inflation falls. It ends when household incomes can comfortably keep up with the cost of normal life again.
What can households actually do now?
Government policy matters, but there are also a few practical areas worth checking while bills remain elevated.
| Check | Why |
|---|---|
| Energy tariff | A fixed deal may beat the default tariff, but compare the full cost and exit fees |
| Benefits and grants | Check entitlement rather than assuming income is too high |
| Mortgage or rent budget | Housing is often the largest expense, so small percentage changes matter |
| High-interest debt | Credit-card interest can overwhelm savings made elsewhere |
| Savings rate | Leaving cash in a poor account quietly reduces its real value |
| Recurring bills | Insurance, broadband and subscriptions can drift upward unnoticed |
So, is the new support enough?
Probably not on its own, and the government appears to know that.
Removing VAT from electricity and capping bus fares are tangible policies. They put some money back into household budgets and, unlike vague promises about future growth, people can see what they are supposed to do.
But the size of the savings needs to be compared with the size of the problem. Energy bills have just risen 13% under the current cap. Housing remains expensive. Many households have exhausted the savings buffers they had before the inflation shock.
The bigger test will come with the autumn Budget and winter energy bills. That is when we will find out whether these first measures were the beginning of a broader affordability plan or simply a handful of popular fixes.
Frequently asked questions
What is the UK energy price cap in August 2026?
For 1 July to 30 September 2026, Ofgem’s typical annual figure for a dual-fuel Direct Debit household is £1,862. Your actual bill depends on how much energy you use.
Is VAT being removed from energy bills?
The government has announced the removal of 5% VAT from domestic electricity from 1 October 2026. The measure applies to electricity rather than automatically removing VAT from every household energy charge.
What is UK inflation now?
The latest official CPI figure available at publication is 2.6% for June 2026. The next ONS inflation release is scheduled for 19 August.
Does lower inflation mean prices are falling?
No. Lower positive inflation generally means prices are rising more slowly. Prices only fall overall when the relevant inflation measure is negative.
Will there be more cost-of-living support?
Burnham has indicated the government recognises further action may be needed, but additional household support has not yet been fully confirmed. The October Budget will be important.
Related reading
Sources and further reading
- Ofgem: Energy price cap, July to September 2026
- ONS: Consumer price inflation, June 2026
- Reuters: Burnham on cost-of-living and business support
- Reuters: UK food inflation, August 2026
- Resolution Foundation proposal reported by The Guardian
Disclaimer: This article is for general information and education only. It is not personal financial advice. Energy prices, government support and economic data can change, so check current official guidance before making financial decisions.
Written by Aren Deu | The Anxious Investor
