The Cost of Living Crisis: The Cost, Cost, and Cost

Ong Li Jun

Weeb; daydreamer; aspiring lawyer. With a heart stronger than his motivation, Li Jun's passion in Malaysian politics resonates through his writing and terrible puns.

*Disclaimer: This is the writer’s attempt to establish and analyse the factors leading to the cost of living crisis. Any points should be researched to better understand the established information provided to avoid errors in understanding.

Part I: The Cost

The UK has seen its fair share of challenges since 2020. With the pandemic taking charge, a series of unfortunate events followed soon after. From having three Prime Ministers in a year to the Queen’s passing, the sterling took a deep dive following political and economic uncertainties. Now, the nation is challenged with its biggest issue yet: the cost of living crisis.

The cost of living crisis (CoL) began in late 2021 as an effect of the pandemic. Inflation was at an all-time high, causing a rise in prices and a fall in the public’s real disposable income. In other words, there was a significant increase in the cost of living compared to the previous year, creating an economic gap that has only worsened.

According to the Office for National Statistics (ONS), the annual rate of inflation (RI) in February 2023 compared to a year before was 10.4%, with the highest-ever inflation recorded being 11.1% in October 2022. For a nation to have a stable RI, the average rate should be around 2-3%. Anything lower than 1% or above 3% is a poor reflection of the nation’s economic growth. The Bank of England has set its expected annual RI to be 2% in 2023. Without diving into technicalities, the direct comparison of 10.4% with the targeted 2% represents a high inflation rate that the government is desperate to tackle.

The RI is commonly calculated using a Consumer Price Index (CPI), which is measured by comparing the change in prices of individual goods and services with their levels in the same month of the previous year. The ONS calculates the CPI by collecting around 180,000 individual prices of about 700 items as a ‘shopping basket’. An example would be comparing the change in the price of February 2023 with February 2022, bringing us to an increase of 10.4%. It should be noted the CPI does not directly reflect the CoL; rather, it indicates what we need to spend now to purchase something previously priced, hence measuring price changes.

The chart shows the fluctuation of CPIH since November 2015, indicating a sharp rise from the quarter half of 2021. The CPIH is essentially the CPI including owner occupiers’ housing costs, a cost associated with the purchasing, maintenance, and living in one’s home, which provides a more accurate statistical representation of CoL.

Part II: The Cost; Cause

Now that the established RI paints a clear picture of how badly the economy is impacted, we need to establish the factors that caused this increase. While it has been generally understood that the crisis is caused by a combination of a high inflation rate and low living wages, an unfortunate amount of unprecedented short-term factors played a significant role in the creation of the crisis. Two major players include the Covid-19 pandemic and the Russian-Ukraine war.

Unsurprisingly, the global pandemic brought on many factors that led to the rise in inflation. During lockdown, many countries are unable to import and export items necessary to their nation, creating a large-scale effect of an increase in demand with a shortage of supply. China, for example, being one of the world’s largest exporters, affected multiple markets in the economy. Flooring, stationery, and DIY materials saw a surge in price in 2022 during the peak China lockdown; fresh food prices followed suit as Shanghai’s port faced a decreasing activity; a lack of export of mechanical parts and electrical components created a low supply chain worldwide for the production of cars, electronics and machines.

The pandemic has also impacted the UK in multiple ways. From a consumer perspective, prices of various goods and services have gone up or become unaffordable due to a lack of disposable income following months of lockdown. Those in the lower income bracket either lost jobs or could not operate their business, effectively losing their primary income source. The increase in electrical, gas, and petrol prices has certainly not helped the situation, with pensioners and single parents struggling to provide for themselves and their children. A survey by the ONS found that 51% of people spend less on food because of the above factors, while as high as 96% experienced an overall price increase.

The Russian-Ukraine war, on the other hand, has disrupted the supply chain of oil, gas, and energy, among other things. Sanctions imposed on Russia reduced the natural oil and gas supply, and petrol retailers have taken advantage of this situation to mark up their profit margins. As a result, the UK saw a sharp rise in petrol prices from 145.6p per litre in January 2022 to 195p per litre in July 2022.

As Russia has always been a key energy supplier to the European nations, the war also created a massive surge in energy prices. Energy uses have affected areas involving household energy tariffs and road fuel costs. The larger effect of the disruption in energy supply could be seen in the fluctuating price of the euro, which is heavily dependent on energy imports. From January 2022 to January 2023, the UK’s domestic gas prices increased by 129% and electricity prices by 67%.

Further, food security is affected by inflation in various items such as wheat, sunflower oil, and maize. The war has increased the cost of production of certain food items and reduced the supply of many more. In January 2023, sunflower and other edible oils saw as high as a 47% increase for euro users compared to the previous year. With Russia and Ukraine both being large producers of nearly 108 million tonnes of wheat and 436 million tonnes of maize collectively in 2021, the export disruption of both items has impacted global prices.

Overall, the larger effect of the war, as indicated by the World Bank in the recent Global Economic Prospects report of January 2023, results in low global growth, with a projected 1.7% growth in 2023 and 2.7% in 2024. Shocks from high inflation, high-interest rates, and reduced investments all play a part in slowing down the expected growth rate.

Part III: The Cost; Consequence

To combat the ever-increasing energy, and oil and gas prices, the UK government announced a windfall tax in the form of the Energy (Oil and Gas) Profits Levy in May 2022. This is an extra levy imposed on oil and gas companies operating in the UK or the UK Continental Shelf. Due to the soaring commodity prices, these companies have been gaining profits at a margin they were not responsible for directly causing; in other words, a ‘windfall’. For instance, Shell and BP both reported profits of £32.2bn and £23bn in 2022, revealing a considerable surge in profit percentage compared to the previous year.

With the introduction of the levy by PM Rishi Sunak, profits from the extraction of UK oil and gas would have a 35% levy in January 2023. Chancellor Jeremy Hunt estimated the total amount gained in the lifespan of the levy till March 2028 would earn an estimated £40 billion. With the Electrical Generator Levy also being introduced on 1 January 2023, a 45% levy would apply for the next six years on ‘extraordinary returns’ from low-carbon electricity generators as another method of taxation. Although this will only apply to ‘exceptional receipts’ of wholesale electricity earning a baseline of £10 million in an accounting period, it is hoped to bring in another £14 billion by March 2028.

An initiative to support businesses and households facing the rise of energy bills took the form of the Energy Price Guarantee. By replacing the already-existing default energy price cap with a volatile cost that depends on the wholesale energy prices and usage, the HM Treasury estimated a saving of around £900 from 2022 to 2023 winter.

Though all seems well, there have been criticisms from the Labour party and the people for the government’s failure to offset rising inflation rates in the first place. For example, business economist Andrew Sentance CBE criticised the failure of the Bank of England’s Monetary Policy Committee (MPC) to raise interest rates in 2021 via monetary policy to combat inflation. The excuse given by the MPC was that rising inflation rates were driven by the surge of global energy and food prices, as well as slowed economic growth on households’ spending power. Sentance believed that the inflation surge had affected many prices beyond what the MPC has described, potentially leading to a longer and sustained inflation that requires immediate correcting. Further, with pressure to increase wages by employees and expectations of the public on rising future prices, decisive action needs to be taken by central banks and policymakers.

In March 2023, a spring budget announcement was made, setting the tone for ‘major economic changes’ by dealing with three of the five key priorities set out by Rishi Sunak in January 2023: to halve inflation, grow the economy, and reduce debt. The effects of the budget announcement will be something to look forward to.

Due to the pandemic, lifestyles worldwide moved from physical to virtual. This created a shift in the workforce, with many people being forced to quit or change jobs. The five most impacted industries from 2020 to 2022, as highlighted by an S&P Global Market Intelligence analysis, are airlines, automobiles, energy equipment and services, hotels, restaurants and leisure, and specialty retail. People have also been taking matters into their own hands. Backed by unions, industrial strike actions have begun across the UK since May 2022, organised by workers of rail, bus, freight, air and more.

The working class felt the effect of the rail strikes the most, coming in various manners. With the National Union of Rail, Maritime and Transport Workers voting in a ballot, its first national rail strikes in three decades took place from 2022 to 2023. As General Secretary Mick Lynch puts it: “Members want a decent pay rise, job security and no compulsory redundancies.” While the Department of Transport has urged for talks before the action itself, no signs showed the unrest stopping anytime soon following three separate failed occasions of discussion.

The London Underground also saw its fair share of strike action, affecting millions a day with delays and inconvenience over dissatisfaction over pensions and job cuts. Similarly, the Associated Society of Locomotive Engineers and Firemen, consisting of train operators, voted to strike in the coming months. With its most recent strike action on 15 March, 99% of the 77% turnout voted for the strike to occur.

Over to mail strikes, the Communication Workers Union and Unite Union began their strikes in various pulses in May 2022. With dissatisfaction rising over the dispute in pay and redundant redeployment programmes, the managers and workers questioned the government’s lack of action to maintain its poor funding state.

Furthermore, Royal Mail postal workers poised a new wave of strike action after Easter following talks by the executives to put the postal service into a form of administration should a deal be unable to be made. This effectively meant declaring the business insolvent and ‘unable to pay its dues’, as The Guardian worded it, which may result in over 140,000 job losses.

The Criminal Bar Association in England and Wales also took part in strikes following a vote in favour on several occasions. To increase remunerations for barristers, most of whom are earning well below the minimum salary due to the nature of the work, the open-ended strike action escalated after a second voting ballot of 79.54% in August 2022.

However, a government deal ended the strike on 10 October 2022. The deal promised an extra £30 million on top of the already-demanded 15% increase in criminal aid legal fees. The aftermath of the strike action saw indefinite delays in cases and backlogs continuing to skyrocket.

The health unions struck in summer of 2022 following the government’s announcement of pay rises below the inflation rate. The British Medical Association for General Practitioners announced a new strike action for four days in April on 23 March 2023 for their continued request of a 35% pay rise. The Royal College of Nursing commenced multiple strike actions in the latter half of 2022 due to failed negotiations with the Secretary of State for Health and Social Care. Similarly, it called off its recent strike action announcement in February, which was going to be the biggest in the UK, after entering into renewed negotiations.

More relevant to students, schools and universities saw disruptions in classes after voting to strike over an unfairly increased pay rate that did not match the inflation rate. With the demand by the National Education Union (NEU) and the University and College Union unmatched, strikes have taken place to this day. The National Association for Head Teachers (NAHT), National Association of Schoolmasters and Union of Women Teachers, and Association of School and College Leaders all held ballots to vote for the action as well.

As of 28 March 2023, the Department for Education offered a £1,000 one-off payment this year and a 4.3% pay rise for most staff next year. The NEU and NAHT disapproved of the offer, while disputes have been suspended in Wales, Northern Ireland, and Scotland.

Concluding thoughts

The cost of living crisis is expected to continue for a while. Projections expect inflation rates to slow down over the next five years as countries across the globe continue to recover from the pandemic. For the UK, her looming adversary would be the cost of living crisis. Some form of consensus would need to be reached by the government to ensure that public unrest would stop, whether it be industrial action or loss of confidence.

References

Ong Li Jun

Weeb; daydreamer; aspiring lawyer. With a heart stronger than his motivation, Li Jun's passion in Malaysian politics resonates through his writing and terrible puns.