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  • Zac Francis

Britain's Cost of Living Crisis, Explained

The ‘cost of living crisis’ refers to the fall in disposable incomes that the UK has experienced since late 2021. It’s often been characterised by rising fuel and energy costs, mass workforce strikes, and a government seemingly unable to deal with it.


Although many are living through the crisis, not all know what caused it or how the government intends to help.


Britain's cost of living crisis explained

What are the causes?


Essentially, the cost of living crisis is driven by inflation — the increase in cost of something over time. If a loaf of bread costs £1 but the price has risen to £1.05 a year later, the inflation rate is 5%.


An increase in inflation doesn’t always result in a cost of living crisis. However, the UK has experienced low wage growth since roughly 2007. This means that people are required to pay more for items despite not having any more money, resulting in a crisis where people literally can’t afford to live.


So, what got us here? Why has inflation soared and wages stagnated?


1. The war in Ukraine


Although sometimes used as a scapegoat for government leaders to wholly justify the UK’s economic decline, it is true that Russia’s invasion of Ukraine has contributed toward inflation.


With life returning to normal following COVID, demand for oil and gas returned to pre-pandemic levels. Russia’s invasion of Ukraine then caused demand to soar and prices to rise (typical at the start of any war), yet supply couldn’t keep up due to Russian sanctions.


Rising profit margins further exacerbated energy prices, as energy suppliers capitalised on climbing oil prices to increase their mark-up. Although this seems normal, Shell recently reported record profits which has raised concerns that energy suppliers mark-ups exceeded, rather than aligned with, the rising oil prices.


The war also reduced the amount of grain available, pushing food prices to record highs. Annual food inflation increased by 16.8% in December 2022.


2. Brexit


Brexit’s contribution to the UK’s economic decline has only recently come to light. In December, researchers at LSE’s Centre for Economic Preference stated that Brexit had added almost £6 billion to UK food bills in the two years up to the end of 2021.


Mark Carney, a former Bank of England governor, pointed to the fall in the pound following the results of the 2016 referendum and its failure to fully recover. Mr Carney went on to say that Brexit had “slowed the pace at which the economy can grow.”


3. Decline of union power


As previously mentioned, wage growth has been outstripped by inflation, meaning people have significantly less disposable income and purchasing power. But while the causes of rising inflation are easy to pinpoint, this isn’t the case for wages.


With the mass strike movement occurring in the UK at the moment, it seems poignant to highlight the decline of union power as a contributing factor. Looking back 50 years ago, trade unions wielded greater influence, and could collectively bargain for increased wages and improved benefits. Fast forward to today, the percentage of employees who are members of trade unions has declined significantly, leaving workers to negotiate at an individual level or find new jobs with higher pay. With the decline of union powers comes the rise of firm power, evident by the rising profits that far outmatch the rise in wages.


However, the UK is currently experiencing its greatest number of labour strikes and industrial disputes in more than a decade with striking rail workers, teachers, NHS workers, barristers and postal workers.


The cost of living crisis explained

Who is it affecting?


The cost of living crisis is disproportionately affecting poorer households. With fewer resources, savings, and third-party assistance, low-income households are struggling to keep afloat.


Inflation has mostly been driven up by the cost of essentials, such as food and energy, on which poorer households spend far more of their income on than wealthier households. Record numbers are turning to food banks and people are rationing their heating to survive. Analysts are predicting a rise in premature deaths as people are forced to choose between starving or freezing.


What's being done?


The UK government is taking steps to help curb the crisis by offering financial support to households who need it. An example of this is the Energy Bill Support Scheme that could save households hundreds on their energy bills. Yet many feel the government isn’t going far enough.The current strikes are symbolic of the UK public’s burgeoning dissatisfaction with the current conservative government. In their eyes, enough is enough.


Charities and NGOs are doing what they can to help but without adequate government support, their resources are stretched thin and, in some cases, drained entirely. Food banks are running out of food, as the Cumbria-branch of the Salvation Army recently reported. Debt advice charity, Money Buddies, reported a 400% increase in calls to its helplines, forcing them to spend money on recruiting additional help.


On the other side of the aisle, the Labour Party has set out its own plans to address the crisis, highlighting a fully funded energy plan that would stop rising bills. With the conservative government intent on holding on to power until the next election, it’s unlikely this proposal will come to fruition.


What does the future hold?


With no long-term plan laid out by the government, and no hero on the horizon, it seems many in the UK must hold on to the hope of spring and being saved by seasonal change.


However, if a positive can be taken from the crisis, it’s that it acted as a catalyst for public action. It has highlighted not just today’s issues, but Britain’s decade-long economic stagnation and the declining living standards. For many in Britain, a decade is long enough.


Edited by Alice Holmstedt Pell

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