The cost-of-living crisis

A look at some of the issues households are facing.

News about the cost-of-living crisis hitting the UK this year has become unavoidable. A toxic combination of soaring energy bills and rising food prices is forcing inflation to levels that haven't been seen for 30 years. Meanwhile, borrowing costs are also increasing, while wage growth is struggling to keep up. Here, we take a look at some of the issues households are facing.

Inflationary pressures

It has been 30 years since inflation ran at the levels seen this January. The start of the year saw fewer January sales and discounts than usual, which pushed prices up by 5.5% January – up from 5.4% previously – as retailers reined in seasonal discounts on clothing and footwear.

Inflation is now outpacing wage growth as energy, fuel and food costs continue to rise, squeezing household budgets. Wage growth in the UK struggled to keep up with increasing inflation between October and December 2021, according to Office for National Statistics (ONS) data.

Average weekly pay packets across Britain fell in December by negative 1.2%, reflecting how wages are struggling to keep up with the rising cost of living. Things are likely to get worse as inflation is forecast to climb above 7% this year, putting pressure on the government to offer more support.

Surging business costs

Around threequarters of UK businesses say they are putting up prices in response to surging costs such as wages, energy and raw materials, according to a survey conducted by the British Chambers of Commerce (BCC).

The survey of more than 1,000 firms showed that businesses across the country are under intense pressure from a variety of costs. It found that prices were likely to rise as a result, further fuelling the cost-of-living crisis for households.

Rising energy bills were cited as the driving factor by 62% of respondents, rising to 75% for manufacturers. Meanwhile, 63% cited increased wage bills as driving prices rises.

The BCC called on the Chancellor to adopt their five-point plan to address these challenges. These include a temporary energy price cap for small businesses and the extension of the financial support announced for households last week to include small firms.

The base rate and the cost of borrowing

The Bank of England has responded to rising inflation by increasing the base interest rate to 0.5% from 0.25% at the beginning of February. The base rate is used by the central bank to charge other banks and lenders when they borrow money – and influences what borrowers pay and savers earn.

This increase means that lenders may raise standard variable rate (SVR) or 'discount' mortgages, while those on a tracker mortgage will see monthly mortgage payments increase.

Those borrowers on SVRs are close to the end of fixed rate deals should check whether remortgaging to a new deal could save them money in the medium to long term.

The Bank of England is expected to raise the base rate again this year so fixing a mortgage rate before this happens could prove advantageous.

Spiralling energy costs

The recent decision by energy as regulator Ofgem to ever increase to the price cap level on energy bills by the steepest level ever is due to hit household bills in April. Some estimates predict an average increase of £693 a year for energy bills that affects 22 million households.

The increase is down to Ofgem raising the price cap on standard and default tariffs by 54%. On 'typical' energy use, this means the price cap will rise from £1,277/year to £1,971/year from Friday 1 April. More than 60% of households are on these standard tariffs.

Unfortunately, there is little that households can do to avoid those price hikes as no cheap deals are available in the market for those looking to switch supplier.

However, the government announced that over £9 billion in state-backed loans will be made available in England, Scotland and Wales, with households set to be given up to £350 to help with their energy bills this year.

Pressure on pensions

Those already claiming the state pension are expected to find meeting the cost of living a challenge this year. This is because the government dropped its triple lock promise for pensions, even though inflation continues to rise.

Under the triple lock policy, the state pension increased every year by whichever is the highest of inflation, earnings growth or 2.5%. However, earnings growth, which was running at 8%, was dropped to create a double lock. The state pension will now increase in April 2022 by 3.1%, which was September's inflation figure.

However, inflation is now running ahead of this figure, exacerbated by higher energy and food bills, which pushed up the cost of living by 5.5% in January.

Rocky road ahead

The cost-of-living crisis will hit both households and businesses this year, if you need advice on improving your cashflow please contact us .

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