Cost of living crisis - Is the end in sight?

Rahul Jeyanand

As you may know, the cost of living crisis has greatly affected everyone, as bills skyrocket and food prices soar. Food banks have been in despair, receiving more demand but fewer donations. Mental health problems are also starting to be increasingly common, as parents go to the furthest lengths possible to provide for their children. As the prices go higher and higher, there’s one question that is on everybody’s mind - when will it end?

To answer this question, we need to understand what the cost of living crisis means and how it has happened. According to the Institute For Government, this means the fall in disposable income (adjusted for inflation and after taxes and benefits) that the UK has been experiencing since late 2021. What this means is that economic inflation is increasing more than wages, which leaves people with less money to spend.

We also need to look at how inflation has increased over time. The main method to measure inflation is via the Consumer Prices Index, also known as CPI. Created by the Office for National Statistics (ONS), it measures the average change of a range of consumer goods and services. The latest CPI figure from the ONS is 10.1% in the 12 months leading up to January 2023, down from 10.5% in December 2022. Despite the decrease, inflation is still at a 40-year high due to the cost of food, and is 5 times the inflation target set by the Bank Of England. Their data also shows that price growth is larger than annual wage increases, as prices stand at 10.7%, followed by private sector wages at 7.2%, and the public sector at 3.3%.  The other fact this data highlights is the gap between the public and private sectors, but this data does not include other factors such as bonuses and pension provisions. Also, the ONS regularly tracks the prices of essential goods and shows the inflation rate. It has reported that annual food inflation was up by 16.8%, with a 46% increase in low-fat milk and a 39.5% increase in olive oil.

There have been multiple causes of inflation. One cause is the COVID-19 pandemic. The pandemic was the cause of a severe recession, with GDP across the world in freefall. Despite government support like the furlough scheme and the economy bouncing back, various sectors such as the entertainment and retail industries are still recovering and could take up to 5 more years to match pre-2019 contributions to the GDP.

Another reason for inflation is Brexit. After David Cameron led the UK out of the EU, there is increased difficulty in shipping items between trading blocs, such as additional paperwork. It has also been more difficult for UK businesses to receive investment. Brexit also reduced overall trading volumes with the EU, worsening the relationship with the trade bloc. However, a positive is actually that Brexit allows the UK to trade more freely with non-EU markets and build trade agreements.

The most recent and one of the most influential causes of inflation is the ongoing conflict in Ukraine.  Due to this, energy prices have soared as people look for alternative power sources other than Russia, and of the biggest players in the current energy market, in a bid to limit their finances in the war. During 2022, energy prices have gone up by 54%, the highest increase since the 1970s. However, this has led to energy companies like BP and Shell to register record profits, despite having more taxes. Ukraine was also one of the world’s largest wheat producers and the largest sunflower producer in the world, usually exporting these goods by ship. However, their major ports are blocked by the Russians, which has caused a price hike for these two essentials. Countries such as Iraq and Egypt import most of their wheat from Ukraine, and because they are less developed countries, they will find it difficult to survive with a reduced amount of essentials, and experts predict that there will be instability in both areas.

Businesses have also been impacted by the crisis, and due to the increasing costs of purchasing goods as well as higher shipping costs. This has ultimately led to many increasing prices to maintain financially sustainable businesses while trying to prevent consumer spending from falling. In addition, it makes investing in companies more difficult, not to mention the rising interest rates, which deters companies from investing in new equipment. Businesses are the primary source of access to goods and services, meaning that amid this time of high demand, supply disruption and price increases will have disastrous consequences for everyone.

However, it should be noted that there are advantages that come with inflation. One of them is that debtors can pay off loans to lenders because they repay their loans with money that is less valuable than when it was originally borrowed. With inflation, spending tends to increase as people fear prices will rise in the future. Rising costs of consumer goods can also increase the value of a company, which allows stock market investors to take advantage of the growing value. Mortgage holders with a low fixed rate also have an advantage, as they are protected from the most disastrous consequences of inflation. As the value of the pound increases, you will keep making the same payment and just be using less valuable pounds for the same payment. This means that over time, people with a low fixed-rate mortgage will be spending less on their mortgage in comparison to others with a higher interest rate.

The Government also has support for those having a difficult time during the crisis. There has been a £15 billion rebate package provided, as well as a £400 grant available to all domestic energy customers through the Energy Bill Support Scheme, and is not required to be paid back. For more than 8 million households on benefits, there was a £650 payment  given last year, and there will be 3 Cost of Living Payments (amounting to £900) available soon, with the qualifying dates to be announced. There is also the Disability Cost of Living Payment, with anyone eligible being paid £150 this summer and the £300 Pensioner Cost of Living Payment, to be given in conjunction with Winter Fuel Payment.

To everyone’s relief, we may be coming to the close of this cost-of-living crisis. The Bank of England among other commentators have forecasted a stabilisation and fall in inflation in search of meeting the 2% inflation target set by the government for 2024. To consolidate these forecasts, Rishi Sunak has pledged to halve inflation before 2023 comes to a close, and the Bank of England has increased interest rates by 0.5% to 3.5% in order to bring down the rate of inflation. This may cause problems such as higher loan rates and increased borrowing cost, but it can slow down price rises and limit long-term inflation.

For now, all we can do is follow the latest forecasts and commentaries surrounding the cost-of-living crisis, and hope that it will come to a close soon. After all the damage it has dealt to everyone of all backgrounds, this economic crisis will surely be remembered in the years to come.