Here, we’ll take a broader look at why the cost of living in the UK has risen so sharply, and what it means for your household.
Why is the cost of living in the UK rising?
Supply chain issues caused by the pandemic and exacerbated by Brexit have had serious repercussions for household budgets across the country. The sharp rise in inflation has been predominantly driven by the recent energy market crisis which has seen wholesale gas prices more than double in 2021. What’s more, the Bank of England has forecast a 5% rate of inflation for next year, meaning that belts will need to get even tighter in the near future.
What is inflation and how does it affect prices?
Inflation is the rate at which the cost of goods rises year on year. So if a loaf of bread that costs £1 in 2020 costs £1.10 in 2021, the inflation of that cost is 10%. Inflation is tracked by the Office of National Statistics and the data gathered forms the Consumer Price Index (CPI).
Inflation affects businesses and households alike, influencing every link in the supply chain. When the cost of raw materials rises due to inflation, and companies need to pay their employees more to keep up with the cost of living, this has a knock-on effect on the cost of the products we buy every day. Likewise, a surge in demand can also push inflation upwards.
Inflation is an inevitable economic force. However, when its rise is disproportionate to our wages (which have, for many of us, been stagnant for over a decade due to austerity), the rising cost of living feels much more pronounced.
Inflation in the UK
As you can see from this graph, inflation in the UK has been extremely erratic over the past 8 years, either far exceeding or falling dramatically short of the Bank of England’s targets. The pandemic has made inflation even more erratic recently, nosediving then soaring within a relatively short space of time.
To put the current 4.2% increase into perspective, inflation in 2020 was tracked at 0.99%, a decline of 0.75% from the previous year.
Why are prices going up?
Inflation can seem as arbitrary and unknowable as the winds. But most of the time we can track inflation to a range of economic, political or environmental factors.
In this instance, the primary drivers of this sharp rise in the cost of living are:
• Higher energy bills caused by a sharp rise in demand for oil and gas
• Higher petrol prices for the same reason
• Government support for businesses drawing to a close
• Goods and labour shortages exacerbated by Brexit, especially for lorry drivers and hospitality staff
How are households affected?
Most households will notice that the cost of the items they use in day-to-day life are getting markedly more expensive due to ongoing issues with supply and demand. This means that, for many households, their income has less value in real terms.
According to the Institute for Fiscal Studies, an individual earning £30,000 (just shy of the average UK salary) in April 2021 would need to increase their wages by just over 7 per cent up to the end of the financial year (April 2022) to maintain the same standard of living.
What items are getting more expensive?
You may have already noticed that the cost of some day-to-day items you rely on has risen. Some of the items that have been affected by inflation the most include:
Gas and electricity
Wholesale gas prices have increased by 250% since the start of the year, resulting in a 28.1 rise in gas bills for consumers. Although electricity prices have not risen quite so sharply, they have still increased by 18.8 per cent. This is largely due to a reduction in wind energy generation due to the calm weather we have experienced this year.
Food and drinks
Food and drink supply chains are still struggling in the wake of the pandemic. As a result, many will have noticed that the cost of foods (especially crisps and snacks and canned goods) has risen by up 7.2%. On average, the cost of food has risen by 1.3%.
The cost of beverages has also increased, rising by 1.2% for non-alcoholic drinks and 2% for alcoholic drinks.
If you’re in the market for a used car this year, you may find that prices are higher than you expected at your local dealerships. A global shortage of semiconductor chips has stymied new car production, increasing the demand for used vehicles. As such, the cost of used cars has risen sharply as dealerships capitalise on the surge in demand, with some models increasing in value by over 50% compared to last year. Petrol costs have also risen sharply along with wholesale oil prices, so filling your second-hand car will be more expensive, too.
Bad news for DIY fans. Supply chain disruption has seen the cost of building materials rise significantly, with timber costs doubling in comparison to last year. The cost of paint has risen by around 10% and the cost of new insulation has risen by around 20% in comparison to last year.
Labour costs are also on the rise, so households considering major renovations may find that it’s more expensive than it was last year to hire a contractor?
Will inflation continue to rise?
Unfortunately, things are likely to get worse before they get better. The Bank of England anticipates inflation rising to, or even exceeding, 5% in early 2022. The energy watchdog Ofgem has already increased the Energy Price Cap in October by £139 from £1,138 to £1,277. Proposed changes to the scheme could see the price cap increased more frequently next year.
Who is affected the most by the price hikes?
Virtually everyone is likely to be affected by this rise in the cost of living. However, those on low incomes without savings to fall back on are likely to be hit the hardest. Even those who have savings will notice that the real-term value of their cash struggles to keep pace with inflation.
Homeowners are also likely to be adversely affected in the coming year. In order to return the Consumer Price Index to its 2% target, the Bank of England is likely to raise interest rates. This means that the cost of mortgage payments are likely to rise for many.
What is the government doing about it?
The government has been worryingly slow to take action. Shadow chancellor Rachel Reeves struck out at the lack of government intervention on behalf of UK households, stating,
“Instead of taking action, the government is looking the other way, blaming ‘global problems’ while they trap us in a high tax, low growth cycle”.
However, there are measures in place to help the UK’s most financially vulnerable energy consumers to save money on their energy bills such as the Winter Fuel Payment, Cold Weather Payment and Warm Home Discount.