Geopolitical instability has led to fears of another rise in UK inflation. IF Senior Researcher, Toby Whelton, argues that young people may be the most exposed to rising prices.
The Chancellor’s comments
Blindsided by the student loan backlash, Rachel Reeves has made several puzzling comments. However, the most notable may be her assertion that the government has helped graduates by bringing inflation down. The logic is that lower inflation reduces interest on student debt, which for Plan 2 loans ranges between RPI and RPI+3%, depending on earnings.
The comment was not only absurd but misleading. Interest rates being tied to RPI, the highest and now widely considered not-fit-for-purpose measure of inflation, is not some immutable law of nature but one of the very flaws of the system being critiqued.
Even then, in theory, the system protects against inflation by indexing the repayment threshold to RPI, so graduates do not pay more per month in real terms. Reeves dismantled this protection by freezing the threshold at the last Budget, placing graduates at the mercy of future inflation.
Besides, given the likelihood of rising inflation following current geopolitical instability, even by the government’s own low bar, they will have failed to protect graduates.
Yet Reeves’ comment does point to a broader truth. If inflation rises, as it did following Russia’s invasion of Ukraine, when inflation reached double digits, it will likely be the young who pay the price.
Government policy has largely created a system that transfers risk onto younger generations while shielding older ones. Young people’s living standards will, in no small part, be determined by the path of inflation in the coming years.
Indexation of pensions and benefits
The primary mechanism for protection against inflation is indexation. Government benefits and thresholds are typically uprated so their real value is maintained. However, there are stark inequalities in how different benefits are uprated across age groups.
Older generations have not only been protected by indexation but have benefited from it. The triple lock ensures the state pension rises each year by the highest of earnings, inflation, or 2.5%. This creates a ratcheting effect whereby, over time, the state pension grows faster than the broader economy and takes up a larger share of GDP.
Older generations are also more likely to be on defined-benefit pensions, most of which are inflation-linked. Regardless of fund performance, retirees receive the same payout. If the economy falters and funds underperform, it is younger workers who bear the cost of the unfunded liability.
In contrast, most current private sector workers are on relatively less generous defined-contribution pensions. If inflation rises, their savings are eroded, and they either retire with less or must increase their contributions.
Meanwhile, indexation of benefits for working-age people has proved far less reliable. Universal Credit in 2025 was increased by 1.7%, based on CPI in September 2024, the lowest month of inflation that year. By April 2025, inflation was 3.5%. In the same year, the state pension rose by 4.1% in line with average earnings.
Some benefits were not uprated at all. Local Housing Allowance was frozen at 2024 levels, pushing 20,000 renters and 10,000 children into poverty. The Benefit Cap and Capital Limits were also frozen. The point at which Child Benefit is withdrawn remains frozen, as does the £100,000 threshold for 30 hours of free childcare, unchanged since 2017.
Perhaps the most egregious example is the maintenance loan threshold, which has not been uprated since 2008. Its real value has fallen by around £16,000, directly contributing to the rise in student poverty by reducing the eligibility of student support.
Fiscal drag
Inflation has not only eroded the real value of working-age benefits, but it has also increased the tax burden. Thresholds for National Insurance and Income Tax were first frozen in 2021, and the last Autumn Budget extended this freeze to 2030.
This represents a significant tax increase. Workers can be dragged into higher tax bands even if their real incomes stagnate. It will also exacerbate current absurdities of the tax system by bringing more workers into contact with the marginal tax rate cliff-edges, such as the withdrawal of the personal allowance and child benefit.
Graduates on Plan 2 face a double hit, as the repayment threshold is also frozen until 2030. This will raise repayment burdens for millions. We estimate that, combined with changes to salary sacrifice, the average graduate will be £24,500 worse off as a result.
Crucially, the scale of the impact is uncertain and depends on inflation during the freeze. If inflation rises more than expected, the threshold will decrease further in real terms, the tax burden will rise, and disposable income will be lower still. In effect, young people’s living standards are being held hostage to inflationary fortunes.
Student debt and mortgages
Inflation is typically beneficial for debtors, as the real value of debt falls. However, this is often not the case for the types of debt young people hold.
Student debt is one such example. Interest rates as high as RPI+3% mean high inflation can cause balances to grow rapidly and become nigh-on impossible to repay. The IFS estimates that the average graduate must earn £66,000 just to clear accumulated interest, yet if balances grow, the figure becomes larger.
Mortgage holders face a similar issue. High house prices and looser lending have left many with vast debts. If inflation rises, interest rates are likely to follow, increasing monthly mortgage payments. The markets already predict we will see three interest rate hikes this year.
It is estimated that rising interest rates between December 2021 and December 2023 pushed 320,000 households into poverty, with mortgage holders’ disposable income falling by 12%. For prospective buyers, higher mortgage rates push homeownership further out of reach.
By contrast, those who own their homes outright, predominantly older generations, are insulated.
Financial precarity
There is also a broader issue of financial precarity. Young people spend a higher share of their income on essentials than any other age group, leaving little room to adjust if prices rise. As essentials take up a larger share of their budgets, rising prices of essentials hit them harder in relative terms.
They also lack financial buffers. ONS data shows that only 40% of 18–34 year-olds could cover a 75% income drop over three months. Most lack large savings or housing equity to draw on in a crisis.
Government spending
This vulnerability is compounded by a lack of government support relative to older ages. Transport costs have consistently risen faster than inflation, and have steadily risen as a portion of young people’s budgets.
Meanwhile, those over State Pension Age, or 60+ in London, are protected from these rises by universal concessionary travel. Nor do young families receive Winter Fuel Payments to help with energy bills or free prescriptions. The welfare state for the young has been steadily withdrawn.
Transfer of risk from young to old
Inflation does not inherently mean lower living standards. If earnings and benefits rise at the same rate, living standards are unaffected. Nor does it inherently harm young people more than old. The winners and losers from inflation are often unpredictable.
However, to some extent, inflation has been weaponised by the government as a means to extract from the young. Frozen thresholds, faulty uprating, and swathes of student debt mean that young people’s tax burden, benefit eligibility and entitlement, as well as pension outcomes, have become dependent on inflation in real terms. The additional revenue raised has been used to insulate older generations from these very effects.
This must be seen as part of a broader trend where risk in society has been transferred to the young. If the economy takes a turn for the worse, it is their savings, disposable incomes, and living standards that will bear the brunt.