For those hoping the 2020s would living up to the “Roarin’ 20s” in the last Century, you would be forgiven for feeling a little short changed!

The combination of the coronavirus pandemic, ongoing climate crisis, and most recently, the renewed Russian aggression against Ukraine, have resulted in a significant financial impact on our daily lives. If dealing with the loss of loved ones, jobs, businesses and personal freedoms was not enough, we are now amid a significant cost of living crisis.

What factors are creating the Cost-of-Living Crisis in the United Kingdom?

The recent coronavirus pandemic has had a significant negative impact on the economies around the world; in order to ensure that economies were able to continue to function, governments found it necessary to increase government spending, investing in schemes such as the Furlough and Coronavirus Job Retention scheme which supported employers to put their employees on temporary leave.

From the end of 2019 to the end of 2021, the government gross debt as a percentage of GDP rose from 83.8%, to 102.8% – this from an additional £500bn of spending. In Europe, only Spain saw a larger increase in debt as a percentage of its GDP than the United Kingdom.

In order to reduce debt, governments can reduce public spending and investments, and/or increase taxes.

It seems that despite the recent claim that the Conservatives have implemented “the biggest tax cut in a decade”, referring to the recent increase of the threshold by which National Insurance contributions are paid (conveniently forgetting that they increased National Insurance contributions three months earlier), the total tax take for the economy is at its highest level since the 1950s at 36.2%, and almost 8% higher than the tax burden in the mid-1990s.

So how far does your disposable income (after taxes) go?

Well, that disposable income isn’t going as far as before either…

The cost of basic food essentials in the United Kingdom, and across the world has seen a significant increase too – dried pasta is up 50% since last year, bread and minced beef is up 16% in the same period, rice is up 15%, milk, cheese and eggs are up by 9.5%, and these are just indicative of the increases across the whole spectrum.

The average basket of goods has gone up by 6.7% year-on-year, measured by the CPI (Consumer Price Index), which means you are having to spend more for the same shop than this time last year.

Fertiliser, fuel and feed for agriculture has been significantly impacted by the invasion of Ukraine, having a knock-on impact on the world’s food availability, and subsequently, prices. The impact is likely to worsen the longer the invasion continues.

Fuel availability doesn’t just impact food prices – Ofgem is expected to increase the price cap by which energy companies can charge us for using electricity and gas, with the expectation that the cap will rise from £1,277 in October 2021, to over £2,800 in October 2022.

Furthermore, prices at the petrol pumps have increased by around 50% too since the same time last year – the average cost to fill up a family car now over £100.

Despite the United Kingdom sourcing only 5% of its energy from Russia, there is an impact on global energy prices as other countries look to reduce their reliance on Russian energy, bidding up the price of energy from the same sources that the United Kingdom uses.

The price rises across the board have resulted in an eye watering level of inflation (currently at 7.9% in July 2022), meaning that the purchasing power of our salary (if unchanged) is reduced.

If your salary remained the same as last year, or you had a pay rise of less than 7.9%, then you are experiencing real terms pay cuts.

Can Inflation be Controlled?

To a certain extent – yes. While global food and energy shortages mean that the prices will continue to be bid up, the Bank of England can limit the magnitude of the inflation increase in the United Kingdom by increasing the Interest Rates, and it has done so steadily since the beginning of 2021, raising it from 0.1%, to its current 1.25% rate.

The reason rate increases work to limit increases inflation are due to the following:

  • Rate increases result in an increased cost of borrowing, which results in lower investment
  • Mortgage payments increase, which reduces the disposable income available to households, and therefore reduces consumption
  • Saving rates are improved, so households are encouraged to save, further reducing consumption
  • Higher rates usually result in money flowing into the UK economy from outside the country, resulting in a stronger pound, and making exports less competitive (increasing imports and reducing exports), which reduces aggregate demand in an economy

With households in a cost-of-living crisis, having the Bank of England implement a policy which puts pressure on households to reduce consumption, and increase the cost of their mortgage certainly will be adding to the current crisis!

Inflation is Justification for a Pay Rise?

Not according to the governor of the Bank of England Andrew Bailey, who asked workers to “think and reflect” on whether they should ask for pay rises which risked fuelling inflation.

He earlier declined a pay rise on this basis, valiantly and selflessly choosing to struggle with the rest of us, on his £575,000 yearly salary.

With the Food Foundation recently performing a study showing that 1 in 7 UK adults, and 2.6 million children were “food insecure”, it certainly feels out of touch.

Additionally, knowing that the coronavirus pandemic resulted in a huge increase in global wealth inequality, asking those who are struggling to choose between food, and heating, to “think and reflect” on whether to ask for a pay rise, is just astonishing.

It does often seem like businesses get the benefit in the good times, but workers are the ones who pay during the bad times.

Unfortunately, the effects of increased borrowing as a result of the pandemic will stifle public investment, and almost certainly necessitate further increases in tax in the future.

Furthermore, the crisis in Ukraine shows no clear signs of abating and will certainly mean that the cost-of-living crisis is likely to get much worse, before it gets better.

We are certainly going to be feeling the hangover of crisis after crisis for a generation, unless more can be done to protect the most vulnerable in our society.