Inflation increased by 4.2 per cent in October, the highest in a decade. That’s more than double the Bank of England’s target and could reach five per cent by April.
This is down to soaring energy costs, experts said, as well as everyday items such as food and clothes getting more expensive very quickly.
UK households could be £1,000 worse-off in 2022, according to Resolution Foundation analysis, as the price tag on daily life combines with benefit cuts and rising taxes to limit how far Brits’ money can go.
Conservative ministers are reportedly concerned the government is doing too little to protect the UK population from an “absolute nightmare” by Christmas.
But why are prices increasing across the board and why are UK incomes failing to keep up? The Big Issue explains.
Household fuel bills were already rising sharply before Ofgem increased the energy price cap on October 1.
This has largely been driven by the soaring price of natural gas, which is now four times as expensive compared to earlier in the year, coupled with increased demand. This eats into energy suppliers’ profits because the price cap limits how much of the extra cost they can pass on to customers – but most companies have upped their prices as much as they can, with concerns bills could rise by as much as £400 per year for some people.
Industry experts say natural gas prices won’t fall until well into 2022 meaning that of around 70 energy providers in the UK, dozens are expected to fold. And after Ofgem increased the price cap by an average £139, it’s possible that it could go up another £200 during the next review in April.
Rising prices could push another nearly half a million more people into choosing between eating and keeping their homes warm in winter, the End Fuel Poverty Coalition said.
Brexit plays a role in rising fuel bills too. The UK’s separation from the EU means it no longer has access to its energy sector, meaning prices in Britain are more sensitive to fluctuations.
Shortages of both lorry drivers and CO2 are driving food and drinks prices up across the country, playing a major role in the UK cost of living crisis.
Supermarket prices increased by 1.1 per cent in August, the Office for National Statistics said, the sharpest rise since around the financial crash in 2008.
After Brexit made it more difficult for EU workers in the UK and some chose to return home during the pandemic – with many citing low pay and poor working conditions – there are too few HGV drivers to transport stock across the country as needed.
The Covid-19 crisis also created a massive backlog in people waiting to sit tests for their lorry licence, meaning many Brits willing to get behind the wheel cannot.
Price inflation for food and drink is expected to continue through to the end of the year at least, a Morrisons spokesperson said, as the staffing shortage translates to higher costs at the check-out. The amount of stock on shelves is at its lowest point since 1983, the Confederation of British Industry said.
Miguel Patricio, chief executive for global food giant Kraft Heinz, said high food prices are here to stay.
Costs were rising around the world, Patricio said, and not just in the UK, but said problems here were largely down to the shortage of lorry drivers.
But globally, a growing population combined with limited farmland for growing food is pushing up the price of commodities, he explained.
The inflation problem is likely to get worse before it improves, experts warned. Food prices could increase by another 2.3 per cent within three months, Capital Economics research showed.
The energy crisis is also impacting the sector. Because natural gas is required in the production of CO2, it has become too expensive for many factories to keep making it. But carbon dioxide is crucial in the transportation, storage and creation of many everyday products.
A recent petrol crisis which saw lengthy forecourt queues appears to have lessened, but prices at the pump continue to rise.
Motorists could face the highest ever petrol prices before the end of the year, according to the RAC, which said filling a tank currently costs around £12 more than it did a year ago.
This is down to massive demand for fuel around the world, the RAC research showed, and not because of the lorry driver shortage.
“As life moves ever closer to normal as the world gets to grips with Covid-19, demand for oil is outpacing supply,” said Simon Williams, fuel spokesperson for the company.
He warned of “further misery for drivers at the pumps as we head towards Christmas” as some analysts predicted further price hikes which could mean unleaded petrol hit a record high of 143p per litre.
Drivers in London and the south east are paying the highest fuel prices in the UK.
National insurance hike
Boris Johnson announced a planned national insurance increase which will see workers paying around 1.25 percentage points more in deductions. This will take in effect in April – when energy bills are next expected to increase – if MPs vote it through.
The rise is to help the NHS recover from the pandemic, the prime minister said, and to fund social care reforms further down the line.
Further bills could be on the horizon for households as the Institute for Fiscal Studies warned council tax bills would need to increase by five per cent a year to keep public services going.
Universal credit cut
The UK cost of living crisis comes just as the government cuts the incomes of millions through a benefits squeeze.
Despite widespread condemnation, Rishi Sunak went ahead with a £20-per-week cut to universal credit which removes £1,040 from the annual incomes of more than 5.8 million people.
The move risks pushing half a million people into poverty, the Joseph Rowntree Foundation said.
Around 40 per cent of people claiming universal credit are already in work, but their wages already didn’t cover their essential living costs, meaning they are forced to rely on benefits.
Now as the prices of daily essentials soar across the board, experts warn the gap between incomes and living costs will be insurmountable for people in the cold winter months.
Who is worst affected by inflation?
The squeeze on UK finances is set to hit young people hardest, researchers said, despite doing “more than any other age group” to protect their money.
Analysis by think tank Demos revealed that people aged 18 to 30 were facing the “greatest uphill battle” to make ends meet.
Nearly half of young people told researchers they would not be able to withstand financial shock because they had too much debt or incomes so low they already struggled to pay essential bills.
Despite being “regularly accused of spending too much money on coffees and avocados and not being financially prudent”, young people were found to be particularly responsible with their money but faced spending the highest amount on essentials on the lowest wages, the report’s lead author Ben Glover said.
There is a lack of support for young people – who often face the incorrect assumption that they have family finances to fall back on – Glover added.
The country’s poorest households are also among the most vulnerable to the cost of living crisis, experts warned, after enduring the most severe financial and health impacts of the pandemic.
People in poverty already spend the highest share of their incomes on daily essentials, meaning an increased cost of living could push them over a financial cliff-edge.
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