Higher inflation hits US expats living in London

The UK’s inflation figures for January have just been released and show a marked increase in the cost of living.  It would seem that the increase in sales tax (now 20%) as well as rising food and fuel prices have all now stared to bite and have begun to push up inflation. This is bad news for everyone living in London and the UK – especially those on a tight budget.  No doubt, some US expats have found their expat finances are being squeezed because of the price hikes here in London.

I certainly have seen a marked increase in our regular weekly food budget, with basic items such as bread, milk, meat, and even pasta more expensive  (or “dearer” as the British would say).  But increases in food aren’t the only thing affecting the family budgets. The unrest in the Middle East coupled with a rise in fuel duty and sales tax, have all helped to push gas prices up.  They are now a staggering £1.30 ($2.11) per litre (£4.90 or $8 per gallon) on average, with nearly half of the cost per gallon due to sales tax and fuel duty.  I imagine that a few Americans living in London are conserving their expat finances and thinking twice about owning or using a car given the high cost of gas.

Another shocker for US expats living in London  is the continued strong demand for rental property in the capital.  This coupled with a shortage of stock has pushed up rental prices dramatically.  Some realtors report that certain areas of London have seen a 15% increase on rental prices since the New Year.  It would seem that many would-be buyers are unable to get a mortgage because of the continued squeeze on mortgage funds, so they are being force into the rental market.  For US expats that plan on living in London for just a year or two, the high cost of renting will have a major impact on their expat finances.  They may find that they are forced to live a bit further out of town where rental prices aren’t as high, although they then have to face a long commute in and out of the city each day.

However, there may be a bit of a silver lining for US expats in London as far as their rent goes.  If they meet certain requirements (including meeting either the bona fide residence test or the physical presence test) they may be able to qualify for the Foreign Housing Exclusion or Deduction with their US taxes.  Assuming that they do qualify, at least they may be able to recoup some of the money they spent on rent while they were living and working in London.  This can be particularly important for Americans in London where rents are sky high, and would be a welcome boost for their expat finances while they are living in the UK.  You can find out more about the Foreign Housing Exclusion by clicking here.

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