Part one: The cost of living crisis

UK inflation is at its highest level for 30 years, energy bills are due to rise by 54% in April, earnings have stagnated, taxes are due to rise, one in four homes are currently in fuel poverty and UK households are expected to be £1,000 worse off by the end of 2022. These are just some of the galling headlines highlighting the ongoing cost of living crisis that will impact millions of people across the UK especially those consumers that are already struggling financially.

This two part blog series looks at some of the causes of the crisis, how this will impact consumers and what’s needed to help us all weather the perfect economic storm.

What has caused the cost of living crisis?

When the pandemic struck and the country was sent into lockdown, businesses scaled back supplies in light of reduced demand. Now that demand has started to recover, the globalised, interconnected web of supply chains have struggled to rebound. Even small delays, such as the Evergreen Marine and the Suez Canal jam, can have longer lasting impacts that cascade across the world, increasing the cost of moving goods (up 4X on some shipping routes).

In addition to broader pandemic forces, Brexit has played a major role in rising costs (estimated increase in import duties of 42%). Legislation changes have contributed to supply chain disruptions, evidenced by the well publicised queues at the channel crossing, and the availability of labour (e.g. HGV driver shortages), has resulted in higher wages across UK supply chains.

These factors are trickling down and reflected in the rising cost of goods to the end consumer.

In the energy market, households and businesses are facing record price increases for electricity and natural gas, whilst petrol prices are at historic highs. Again, there has been a significant imbalance between supply and demand in the natural gas market, which has led to record wholesale prices. Due to a colder 2021 winter and higher international demand for gas particularly in Asia, there were lower stockpiles than usual going into the 2022. There has also been less wind generation which has contributed to a greater reliance on non-renewable energy sources. Natural gas is a key input for the UK’s electricity generators and this cost increase flows through to underlying bill payers.

To date UK consumers have remained relatively protected from the impact of the record high gas and electricity prices due to Ofgem’s consumer focused price cap. This will change in April when the price cap rises increasing the average household energy bill from £1,277 to £1,971. Escalating energy prices also contribute to broader price inflation for consumers as all businesses will feel the impact e.g. haulage, factories or simply keeping the office lights on. 

Elsewhere telecom contracts are also set to rise. Both O2 and Virgin Mobile are increasing contract prices this year by 3.9% plus inflation (expected to peak at 7.5%), a potential increase of 11.4%. BT have already announced some contracts will rise by as much as 9%. Estimates show mobile price rises could impact around 19m consumers this Spring.

To try and stem inflation, the Bank of England increased interest rates in December by 0.25% and again in January with the expectation of at least two more increases in 2022. In theory this will filter through and help to lower the rate of inflation over the next 1-2 years, but the immediate impact will be higher costs for borrowers, which again will squeeze household budgets.

19% of UK adults have less than £100 in savings, so these increases are being keenly felt by many. The second part of this blog will look at the impact the cost of living crisis is having on household behaviour and what can be done to weather the storm.