Inflation hits 40-year high as UK faces cost of living crisis
Words Sarah Adama
Inflation in the UK hit a new 40 year high on Wednesday. Official figures showed the latest rise in the inflation rate from 9% in April to 9.1% last month, as predicted by economists, who believe this will hit double digits by autumn. With soaring gas and electricity prices, The Bank of England warns this number could be 11% by October, a rate higher than similar countries in the G7. Though the government announced billions in emergency support, citizens and experts alike are skeptical about the handling of the crisis.
Cost of living crisis refers to a situation where the cost of everyday necessities, food, fuel, heating, transport, entertainment, housing and rent rise faster than real wages. The price of food and fuel are rising vicariously. According to the Office of National Statistics (ONS), the main contribution to the high inflation rate came from food and non-alcoholic drink prices rising at the fatest annual rate since 2009; prices rose from 6.7% to a 13-year high of 8.5%. Bread, cereals and meat have become more expensive, coupled with increasing cost of petrol and energy bills, low income families are set to bear the brunt of this squeeze. Petrol and diesel have hit record prices, with petrol at 198p a litre and diesel hit £2 per litre on 22 June. Motor fuel prices have jumped by over a third over the past year and continue on this upward trajectory daily. It has been ‘the biggest annual increase on records dating back to 1989’.
Periods of inflation are normal in any economic cycle, however, they are usually abated with increased income. Data shows that since 2007, real wages in the UK have stagnated, as such inflation has been higher than nominal wage growth. According to data, the average full-time salary in the UK is £31,285 (in 2021), which after tax and national insurance contributions, does not give families much to live on. Meanwhile, this week the government and Network Rail are clashing with rail unions in disputes over pay and conditions, as the country sees its biggest train strikes since the 1980s. The government’s offer of a pay rise of just 2% has been criticised.
Data forecast from the Resolution Foundation shows that despite the increase in inflation, an annual rate of 8.4%, which will hit 10% in some months, incomes won’t increase at the same rate as prices. Real incomes will drop by 4.1% this year, their highest rate in 40 years. Simply, wages have been stagnant for decades. Between 1980- 2000, median disposable income increased by £8,529 (67%) alongside inflation. But between 2000-2020, household income growth only increased by £3,584, at only 17%, 50% down from the previous decades. Now, with rising prices, the lowest earners cannot afford basic necessities.
Why are prices increasing rapidly?
Since 2021, cost pressures have grown increasingly apparent in the economy. Factors such as gas prices, Brexit, disruption to global supply chains and more recently, the Russian invasion on Ukraine which has had knock-on effects on company operations, european industrial production and disruption to supply of energy to the EU. Though the UK is not a part of the EU and only imports 13% of its total fuel from Russia, it remains vulnerable to the EU which relies on Russia for its energy. The integration of the energy markets means that UK and EU gas and electricity prices move up together. A new study has found that Brexit has, and will continue to contribute to the cost of living crisis. According to a report from the London School of Economics, Trade barriers have driven a 6% increase in UK food prices, with the UK still unable to strike a trade deal. Brexit has ‘damaged the country’s competitiveness’ and has left the UK in a worse off position than pre-brexit. Even if there are attempts to recover the economy, Wall Street's top banks believe the UK to be an outlier among developed countries as a result of the economic damage caused by Brexit. Official reports detail how Brexit has affected the country's growth potential and is costing workers hundreds of pounds a year in lost pay. Compared to what would have followed a remain vote in 2016, the average worker is set to lose more than £470 in lost pay each year by 2030, as stated by Resolution Foundation and leading academics from LSE. Correctly so, as even where cost pressures begin to fade, immigration controls and disruption to supply chain has weakened the pound and made the economy vulnerable. Brexit isn’t the cause of the cost-of-living crisis, but there is no doubt its impact will make solving the living crisis much more challenging