The U.K. Cost-of-Living Crisis

Current Situation

In April 2022, inflation reached a 40-year high, with the Office for National Statistics (ONS) calculating the cost of everyday purchases as 9 percent higher than the previous year. This has led millions of people into poverty:

• One in ten parents will visit a food bank in order to feed their children in the next three months.
• One in five adults have skipped a meal due to food insecurity in the past year.
• One in three Britons cannot afford to heat their home.
• One in two Britons struggle to afford their commute to work due to a 60% increase in fuel costs in the past year.
• One in two families are poorer in real terms due to the cost-of-living crisis than they were twelve months ago.

The cause of this crisis stems from a number of different factors:

• A 335% increase in the wholesale price of gas over the past twelve months. This is in part due to Russia’s invasion of Ukraine triggering a European initiative to move away from Russian gas. However, it is also the result of reduced output from other energy sources such as nuclear, solar, and wind, as well as increased Asian and South American activity in LNG markets.
• Fallout from the COVID-19 pandemic. Significant disruption to supply chains, such as a shortage of semiconductors vital to consumer goods (such as laptops and smartphones) and corporate interests (factory equipment and server farms), has driven prices up. The pandemic also had an impact on global shipping costs, with the average price to ship a large container increasing over 400% since 2020.
• The Russia-Ukraine war has also contributed to rising food prices. Ukraine is a key exporter of wheat and sunflower oil, and the World Bank’s Food Commodity Price Index is 80% higher places agriculture commodities 80% higher than they were two years ago.

The situation is forecast to deteriorate further. The Bank of England doesn’t expect inflation to peak until Q4 2022, after exceeding 10%, largely due to the energy price increases. Following a 54% energy price cap increase in April, Ofgem predicts an additional 40% increase in October, raising the average energy bill by £800 a year. Renewed pandemic lockdowns in China will continue to impact global supply chains, and agriculture markets will continue to be disrupted as Russia shows no signs of leaving Ukraine.

Labour's four-point plan to tackle the cost-of-living crisis misses the mark

Cut VAT on home energy bills:
VAT on domestic fuel bills is currently charged at 5%. With the energy cap estimated to rise by a further 40% in October, the average household energy bill is forecast to reach £2,800 per year. A maximum average return of £140 is meagre in comparison to the £550 per household average provided by Sunak’s May 2022 proposal, which itself is not enough to compensate a £1,500 average increase throughout 2022.

Reduce energy bills by insulating 19 million homes:
Insulation is an important long-term strategy being presented at a time that requires immediate short-term results. Insulating homes will take years, and does not provide support to people who face ultimatums this winter between feeding their children or heating their homes.

Cut small business rates:
Cutting small business rates does not provide support to the majority of below-average income Britons who a) do not run small businesses; b) do not work for small businesses; and c) do not acquire energy or food from small businesses. Similar to insulation, it is a worthwhile future reform, but not beneficial to those hit hardest by the cost-of-living crisis.

Buy, make, and sell more in Britain:
This is stock, patriotic rhetoric that may generate support from traditional red-wall voters lost to the Tories during the 2019 election, but it does nothing to tackle the crisis at hand.

Proposed Next Steps

1. Labour should publicly state that they would impose strict limitations upon future price cap increases to protect the consumer from spiralling energy prices. The wholesale increase of gas prices alone is not an attack line against the Tories. However, dismal gas storage levels are. In 2017, Centrica were allowed to close Rough, the country’s biggest gas storage site, without a replacement. This leaves the U.K. on a ‘just-in-time’ procurement strategy, providing no room to protect customers in the event of a crisis. Many European countries have large storage facilities from which reserves have been drawn, shielding their citizens from surging energy bills. Since the start of the year, France has withdrawn gas reserves totalling ten times that of Britain’s entire stockpile. In April, French citizens saw a maximum increase of 4% on their energy bills. Meanwhile, Britons received an energy price cap increase of 54%. The Russian invasion of Ukraine has exacerbated the problem but is not solely responsible. Natural gas accounts for approximately 40% of British energy consumption, and under this Conservative government, the British public have been falling out of a plane without a parachute, trusting the Tories to catch them. The Tories have failed. Labour’s current windfall tax proposal, while important, is only being positioned as a one-off levy. Cutting VAT on home energy bills provides some relief, but not nearly enough. Consumers need to be protected from future crises, not just this one.


2. Labour should advocate for an increase in worker salaries, starting with aligning the minimum wage to the real living wage. Rising inflation costs should be addressed through increased interest rates. However, the last time inflation accelerated to this extent, it took years to get it under control. British people cannot cope with a cost-of-living crisis that lasts years. Raising the minimum wage would provide support to the country’s lowest earners at a time when they need it most, at a much faster rate than a home insulation initiative would.


3. Labour MPs should donate their £2,000 April pay rise to charities such as the Independent Food Aid Network or the Energy Saving Trust, that provide actionable support for those who are most impacted by the cost-of-living crisis. In 2021, the median U.K. salary was £25,971. The salary for an MP was £81,932. At a time when 50% of households are worse off in real terms than they were twelve months ago, a £2,000 pay rise for MPs does not look good, regardless of the input that MPs have regarding their compensation packages. Whilst a small amount overall, it is a gesture that would play well to working class voters who are currently bearing the brunt of this crisis.

References

1. Labour. (2022, July). Cost of living crisis.
2. MHM Treasury. (2022, May 26). Policy Paper: Overall government support for the cost of living: factsheet.
3. Hourston, P. (2022, June 1). Cost of living crisis.
4. Jackman, J. (2022, May 25). The 6 Key Reasons Behind the UK’s Gas Price Increases

· Image credit: Alisdare Hickson, CC BY-SA 4.0, via Wikimedia Commons