As the Bank of England’s Monetary Policy Committee announced yesterday (23 September) that it expects inflation to rise above 4 per cent before the end of the year, the Joseph Rowntree Foundation has calculated that rising bills, soaring prices and changes to government policy will cost lower-income families an extra £710 a year. So what are the main drivers of this cost-of-living crunch?
Energy bills are about to rise, and rise again
Are gas and electricity bills about to increase? The answer, for millions of households, is yes: annual energy bills will rise next Friday (1 October) by £139 for the 15 million households on a standard variable tariff (the default tariff used by most long-term customers) using energy at the typical rate. For the 3.2 million households that pay via prepayment meters, the rise will be £153. Prepay meters are more likely to be used by lower-income households and by people who are already in debt to their energy supplier.
But energy bills are also forecast to rise again in April next year, by an even greater margin. The current rise is based on wholesale prices in the six months up to July this year, and when the cap is recalculated again in April, it will be based on the six months from August to January, including the current period of very high gas prices. Several of the factors that created the current spike – the ongoing economic effects of the pandemic, the geopolitics of energy supply, the UK’s overdependence on gas – are long-term issues, so it’s not likely prices will dip again soon. Energy market analyst Cornwall Insight has predicted a 14 per cent increase, to £1,455 a year for typical users.
Petrol prices are at their highest level since September 2013
Are petrol prices going up? They already have – the average tank of fuel now costs £10.14 more than it did at the start of the year. But the current shortage of HGV drivers threatens further and steeper price rises; petrol stations operated by BP, Shell and Esso have reduced their operations or temporarily closed. Lower-income households are more vulnerable to “car-related economic stress” and sudden increases in the cost of fuel.
Rent and house prices are both rising at the fastest pace for more than a decade
In Rightmove’s house price index, the significant record is not so much the all-time high in asking prices (up 5.8 per cent since last year), but the highest competition ever recorded: the number of buyers contacting agents per property is more than twice the pre-pandemic level. With mortgage rates at historic lows (a 0.79 per cent deal, the cheapest home loan ever offered, was launched last week by the Co-op Bank), home ownership is cheap for those who can afford it – but for first-time buyers already spending a high proportion of their income on mortgage payments, even a small rise in interest rates next year could make for an uncertain future.
The rental market is also being overheated by demand, thanks to booms in home working, relocation and domestic holiday lets. The latest HomeLet Rental Index shows the average cost of a new tenancy in the UK has risen by 6.9 per cent over the past year, or by 8.1 per cent excluding London. Rents in Wales are up by 12.8 per cent in a year. Again, then, those at the lower end of the income scale face the steepest rise in the cost of living.
Supermarkets are becoming more expensive
Exclusive polling for the New Statesman by Redfield & Wilton Strategies found that of a representative sample of people in the UK, 69 per cent had noticed a rise in the cost of the foods in their regular shop in recent months. Most people (67 per cent) also said they had seen fewer supplies on shelves, and a similar number (63 per cent) said they were concerned about food shortages in the coming months. Tesco, Morrisons and the Co-op have all warned that price rises are imminent.
This is partly a result of the 69,000 lorry drivers that the UK lost between 2020 and 2021. Around 12,500 of these were from the EU, but most were British drivers who, having experienced poor conditions, low pay and the IR35 tax change – which placed a further squeeze on pay – retired or switched jobs. The high price of CO2 (another result of the gas crisis) is also to blame, and more broadly there are global increases in food prices due to an ongoing shipping crisis, extreme weather and reduced harvests that have affected commodities such as coffee and wheat, pushing the UN’s FAO food price index up 32.9 per cent in the past year.
Once again, this will be disproportionately felt by those on low incomes, because the share of income spent on food rises as income declines.
Cuts to benefits, tax rises, and the end of Covid support
Three government measures – a 1.25 per cent increase in National Insurance, which will cost someone on the median UK salary an extra £254 a year; the end of the £20-a-week uplift in Universal Credit payments on 6 October; and the closing of the furlough scheme at the end of September – could have a serious effect on UK household finances. The most severe impact will be on that portion of the 1.6 million people currently supported by the furlough scheme whose employers don’t keep them on after the end of next month. If this fate befalls a large number of people it could have a knock-on effect on the competition for jobs, and therefore depress wages in some sectors.