Will the Cost of Living Get Better or Worse in 2026?

6th January 2026

Inflation Is Expected to Ease, But Remains Above Target.

Most independent forecasts show that inflation, the main driver of cost of living pressures should fall in 2026 compared with 2025.

Organisations such as PwC and the British Chambers of Commerce expect inflation to moderate in 2026 — potentially dropping towards the Bank of England's 2% target as price pressures from energy and services ease.

KPMG and other forecasters also expect the headline inflation rate to gradually decline during the year, helped by lower energy costs and cooling sectors.

What this means: While inflation won’t feel as intense as in 2022-24, prices will still be rising — just more slowly. Many families will still feel squeezed, even if the pace of price increases is weaker.

Everyday Costs Still a Pressure Point

Even as headline inflation cools:

Food prices are still rising faster than many other categories, with retailers reporting shop price inflation ticking up at the end of 2025.
Reuters

Households are borrowing more on credit cards, reflecting strain on budgets during holiday seasons and ongoing high living costs.

Bills such as school meals and other day‑to‑day expenses continue to rise in some regions, adding pressure on family finances.

So even if inflation headline figures soften, people may still feel worse off in their wallets because core costs like food, childcare, rent and insurance remain high.

Income and Wages: Mixed Signals

The picture on earnings isn’t entirely positive:

Pay rises have been modest and in many cases below inflation, meaning real incomes have been squeezed.

Minimum wage increases are coming in 2026, which helps low‑paid workers — but these gains can be partly eaten by higher living costs and tax "fiscal drag."

So while wages are growing, the real‑terms benefit for many households will be limited unless inflation falls more sharply than expected.

Government Measures Will Help Some Costs — But Not All

Some government actions are intended to ease living costs:

Energy bills are forecast to fall somewhat in 2026, with households potentially saving around £150 on average as price caps are adjusted.

Transport fares and fuel duties are being managed to keep costs down, and policies are in place to target inflation.

However, critics point out that other costs — such as food, rent, and general household spending — will continue to rise for many families.

Broader Economic Conditions Remain Subdued

Economic growth in 2026 is forecast to be modest — around 1–1.3% GDP growth — which is positive but not strong enough on its own to dramatically lift many people’s living standards.

Unemployment may tick up slightly, and weak productivity could hold back earnings growth in the medium term.

So What’s the Bottom Line for the UK Cost of Living in 2026?

It’s a mixed picture:

Inflation should come down in 2026, meaning prices won’t rise as fast as recent years — which is good news in principle.

But prices will still rise (albeit more slowly), especially in areas like food and everyday essentials that hit households hardest.

Wage growth isn’t clearly keeping pace with living costs, so real incomes may stay under pressure for many households.

Budget pressures — credit card borrowing, discretionary spending limits, rent and childcare costs — are likely to continue.

Bottom Line:

Cost of living pressures are likely to improve slightly in 2026 compared with the peak inflation years — but for many households, day‑to‑day living costs will remain tough.

Wage increases and price cooling may help a bit, but most people aren’t likely to feel dramatically “better off” by year’s end. The overall situation may be slightly better or broadly the same, but not a complete turnaround.