How and why living in the UK has become so costly
The trouble with economic issues is that they don’t just hit the headlines. They transmit themselves into our daily lives: a few more pounds at the forecourt pumps, the shopping bill being a little heavier and the bills taking larger bites out of the bank balance.
Like the coronavirus, inflation, the hot topic of 2022, has been prevalent all around the world. Central banks from West to East, the USA to Japan, have been rushing to ‘flatten the curve’ as much as they can, lifting up interest rates.
The UK is also knuckling down under the pressure of inflation, bouncing back up to 40-year highs of 10.1% CPI last week. “The enemy that makes everyone poorer”, according to the then-Chancellor and now PM Rishi Sunak, has rocked both families with bills shooting upwards and markets that have crashed downwards, further destructing after the mini-Budget.
It is clear people are struggling: 2.3 million households and 1.8 million households were in debt on their electricity bills and gas bills in June1, according to Ofgem while the Financial Conduct Authority says around one in four adults are facing trouble with keeping up with their bills2, deeming themselves financially vulnerable.
Here I focus on what inflation looks like to households and look behind the charts into a few factors causing these price rises.
Let’s begin with the obvious one: energy prices. The outgoing Prime Minister Liz Truss’ main policy achievement will be the Energy Price Guarantee, protecting households from energy bills of over £4000. The price of oil and gas has skyrocketed since the start of 2022, before cooling off slightly in the past few weeks. This has fed itself into our electricity and gas bills, making our energy meters tick faster.
The fuel prices at the forecourts have been pumped up as well. From around 130p per litre of petrol or diesel before the pandemic, these numbers have zoomed up to 185p/litre petrol on average in June, whilst diesel was at 191p/litre3.
Another big component of bank account pressures is food prices. Initially, there were shortages of vegetable oil, flour and fertiliser but these have now been followed by dairy products and staple foods. The ONS estimates that budget food items at the supermarket are costing families 17% more compared to last year4. Items like cooking oil, bread, pasta, biscuits, flour, milk, tea and cheese are all significantly more expensive than before, along with most other household essentials.
Now let’s match up the effects to the causes.
Energy
The Russian invasion of Ukraine led to sweeping sanctions from the Western powers, aimed at inhibiting the Russian economy. Given Russia is one of the world's largest oil exporters, they wanted the economy to suffer where it hurt most. But this, in turn, reduces supply (on top of existing poor gas storage supplies in Europe_ and extends the wholesale price for this worldwide necessity.
The US has announced a complete ban on Russian oil imports. The UK is phasing out Russian oil, and EU leaders say they will block most Russian oil imports by the end of the year. This means demand for oil from other producers has increased, also leading to higher prices.
Although the UK imports just 6% of its crude oil from Russia, it is still affected when global prices rise. Furthermore, as oil is paid for in US dollars, a weakened pound (hyperlink to my article! https://gaeeuk.org/blog/5ka9h2hj6z9f3mtn8n9hdbx76pk8em) and a stronger dollar further increase the price.
Parts of Asia experienced an unusually cold winter9, dramatically increasing demand for energy in manufacturing
Additionally, large oil companies and investors sought to take the pandemic as an opportunity to go green and reduce dumping new money into fossil fuels. This lack of investment has made fixing post-pandemic problems more difficult.
Food
The price of wheat shot up during the outbreak of war as the world’s ‘breadbasket’ Ukraine, responsible for 9% of the world’s grain, was struggling to export its stockpiles of goods. Paired with their opponent, 29% of the world’s wheat, 20% of corn and 16% of maize originated from the two countries5. Sunflower oil also saw its struggles, with Russia and Ukraine exporting 80% of the world’s sunflower oil.
Russia and ally Belarus also export a large proportion of the nutrients and minerals needed to produce fertiliser, such as potash and phosphate, a key ingredient in the production of food.
The UK is an import-heavy economy, especially with regard to food. Hence, the pound weakening since the start of the year has led to inflation being ‘imported’.
There are some general factors that should be considered as well
Supply chain issues - there were massive downsizings of operations during the pandemic which was costly and time-consuming to ramp back up. Prolonged factory closures in Asia e.g. China’s zero-Covid policy have resulted in fewer semiconductors, crucial to many consumer goods10. Buckling under the overwhelming surge in demand after the pandemic, the strain on shipping, logistics, distribution and production, all recovering after the pandemic, has increased global inflation.
Labour market issues - the aftermath of COVID-19 saw thousands of working-age people retire along with those who sadly passed away. The harsh reality is that you are left with vacancies and labour shortages, combined with fewer workers from Europe and beyond due to Brexit3. Lorry drivers are also in shortage, sending transportation costs upwards.
Trade barriers - these are more long-standing yet noteworthy complications. US tariffs on Chinese imports, introduced under President Trump, coupled with Brexit trading rules have certainly added to the problem6
However, it is worth mentioning that there aren’t just supply-side issues.
The demand for fossil fuels rose dramatically as countries reopened from pandemic lockdown measures, rebooting production and seeing swathes of international travellers.
There is a marked shift in spending as consumers stuck at home purchased more goods6 (than services), also taking its toll on global supply chains regaining stability post-pandemic.
This was complemented by the pent-up demand during the pandemic, fed by heavy government income support schemes like the UK’s furlough scheme, and loose monetary policy across the world e.g. the Fed issuing a huge $3 trillion dollars in the last 3 years, shooting up the money supply and eventually inflation7.
The past year has seen the global economy being plagued by inflation, primarily driven by the Russian invasion of Ukraine and the COVID-19 pandemic, specifically its consequential impacts. The UK has had its own slice of the trouble, with prices rising to levels unprecedented and for many, unheard of. The energy price freeze brought in last month along with the potential cooling off of gas prices8 will help bandage the wound. Alas, the cut to the skin is too deep and too big: there is further pain to come and future scars to see before the healing begins.
Bibliography
The Guardian, More than two million UK households are in debt on their electricity bills, Chaminda Jayanetti, October 22 2022
The Guardian, Almost 8m people in UK struggling to pay bills says City watchdog, Kalyeena Makortoff, October 21 2022
BBC, Inflation: Fuel, milk and eggs push prices up at fastest rate in 40 years, July 20 2022
The Guardian, Prices of staples such as pasta and tea soar in UK, hitting poorest hard, Mark Sweney, October 25 2022
BBC, How much grain is being shipped from Ukraine?, August 22 2022
BBC, Inflation: Seven reasons the cost of living is going up around the world, January 20 2022
CNN, Opinion: The bad news about the economy, May 12 2022
iNews, Cost of living: Falling wholesale prices could put an end to rocketing energy bills within months, Katie Grant, October 24 2022
Forbes, Cost Of Living Crisis: Government Pulls Plug On Energy Price Guarantee, Laura Howard, October 19 2022