UK’s Cost of Living Crisis
Energy Transitions, Food Inflation and an Impending Un-Festive Holiday Mood
Food price inflation hit 16.2% in October, and energy and fuel costs also rose sharply, pushing the overall inflation rate to its highest level since 1981 at 11.1%. This has left many middle and lower-income families struggling to provide for their families as income inequality has widened. Especially, ahead of the Christmas holidays, the purchasing power (the financial ability to buy goods and services) of middle-lower income individuals has dwindled drastically. “Based on the current rate, shoppers will have to spend an extra £60 in December to buy the same items as last year,” said Fraser McKevitt, head of retail and consumer insight at Kantar.
Food prices have been on a rise following the gas import cuts from Russia, as they reduced supplies as part of its invasion of Ukraine, pushing up the energy bills for UK households and businesses, and hitting the lower-income families the hardest. Households in the bottom 10% of income tend to spend around a fifth of their weekly income on food (the largest compared to other income groups).
The Impact of Food Inflation
The effects include nutritional loss as consumers opt for cheaper goods, and as the purchasing power of the poorest individuals continues to decrease consumer confidence and demand, it will lead to further losses for the hospitality and retail sector in the UK.
Prioritizing the energy transition over environmental criteria
Due to the energy crisis, there has been an increased demand for coal production to find alternatives, and for the first time in 30 years, the UK has approved its first coal mine. This was mainly justified by the argument that this would create more jobs, however, based on the widespread western pledges to eliminate coal as a fuel, these jobs might not last long. An alternative could be fracked natural gases (cleaner energy) with jobs that would last longer.
Additionally, this choice is mostly seen as politically driven, as conservatives try to maintain control in rural areas. Moreover, it undermines the UK's position as a leader in environmental issues. Furthermore, the climate change committee says that by 2037 three-fifths of coal use in UK steelmaking will have been replaced by resource efficiency, electrification and hydrogen use. Coal from this mine will largely be exported and not wanted by UK steel companies.
Bank of England’s interest rates increases
As we are approaching the next interest rate deadline (December 15th) the Bank of England is preparing to increase interest rates again as a result of the recession. The prospect of a year-long recession will hit living standards, cut business investment and damage the long-term productive capacity of the economy. The monetary policy as of yet was to increase borrowing costs (interest rates) and decrease the money supply. This is an example of a contractionary monetary policy primarily used to fight inflation by contracting the economy. Therefore, reducing the willingness of consumers to spend, especially using their credit cards. This looming increase just before Christmas and the food inflation will probably leave families facing the harshest winter yet.
Possible Solutions that the Government can implement
A way in which households can try to soften the impacts of food inflation could be through meal planning and reducing food waste. The government could help lower-income people, by increasing universal and pension credits. Contrary to Lizz Truss’ (former prime minister) economic policies of trickle-down economics (reducing taxes on the rich and corporations in hopes that they redistribute this to the lower income groups). The assumption here is that the rich would be willing to redistribute their wealth into the economy. As we have seen, most wealthy people invest in foreign luxury goods and it is mostly the middle-lower income groups who redistribute their incomes into the economy, as they are also less likely to save money. Therefore, it is vital for the government to financially support these groups, which they could do through energy support payments.
Furthermore, by scraping VAT (Value-added tax) on energy bills, VAT on domestic energy is charged at a rate of 5% and it would save a typical consumer £154 over the year. This would help lower-income individuals who are the ones seeing the biggest increase in energy bills and the ones who consume the most.
Moreover, if the labour unions increase pressure on the government to increase wages so that they are not disproportionate to the rising inflation, whilst this might increase inflation more, it might lead to fewer income inequality gaps for the most vulnerable groups.
Written by Begim-Ana Kalymbet | Proofread by Yasmin Uzykanova
