When we look at world events right now, it certainly puts our own problems in perspective. But by now, you may be feeling more than a little anxious about the cost of living crisis which is creeping up on all of us. So, how worried should you be? And are there any glimmers of hope on the horizon? Let’s have a look at what’s been happening, and what’s coming down the track.
The story so far
Let’s not beat about the bush. Nearly everything is getting more expensive, especially our energy bills, and navigating current world energy geo-politics will squeeze budgets even further.
Lockdowns around the world started it, because restarting economies after putting them in a deep freeze takes time. That led to shortages across the board, including, most crucially, oil, gas and lorry drivers, as demand bounced back. When businesses face higher costs, prices tend to go up. The Bank of England spent last year telling us we would just have a spike in inflation – the rate at which prices rise over a 12-month period – before everything calmed down.
Things haven’t exactly worked out that way. Inflation started rising even before Russia invaded Ukraine: now, it’s at 5.5%. But food and energy price inflation is far higher and the poorest households are facing 9% inflation Link opens in a new window, according to the Institute for Fiscal Studies. Food prices alone were up 2.7% in February, the highest rise for nine years, not helped by poor global harvests. And wages just aren’t keeping up. After taking inflation into account, average weekly earnings fell by 0.8% in the final quarter of 2021.
The energy crunch
Energy is our biggest pressure point right now. Already our domestic bills are set to rise by over 50% in April 2022, to nearly £2,000 for those on standard tariffs protected by the government’s price cap.
For anyone coming off a cheaper fixed tariff, the rise could be 100% or more. Pump prices are up 24% in a year and rose by 2.5% in the first week of March as the Ukraine crisis deepened.
Can it get worse? The oil price is predicted to stay at current levels during 2023 at the very least, and perhaps for three or four years, according to the IFS. So that is likely to keep fueling overall inflation too. The average domestic energy bill is now forecast to rise by another 50% to nearly £3,000 later this year Link opens in a new window – which would be catastrophic for the poorest.
What can the Government do? Even though he is pretty broke after fighting Covid, the Chancellor Rishi Sunak is doling out £9bn worth of support to households due to the increase of the energy price cap.
Anyone in council tax bands A to D who pays their bills by direct debit will get a £150 discount this year. And everyone who pays a gas and electricity bill will be loaned £200 by their energy company, to be repaid over five years.
Not everyone is happy about this. Many do not like being given a loan they did not ask for. But for those who do, the extra £40 a year over five years will have to be found at a time when, quite possibly, energy prices are not coming down.
The IFS says the Ukraine crisis will add £43bn to our energy bills Link opens in a new window – almost five times the Chancellor’s £9bn handout. So, I’d expect at some point a national energy-saving campaign, urging households to turn down their thermostat and don a jumper.
The energy crisis is also feeding into inflation, which could soon jump to 11%. This would leave a worker on average earnings £800 worse off this year in real terms, according to the IFS. It reckons the Chancellor may have to “spend and borrow billions more” than he had intended this year. Estimates elsewhere are even more gloomy. The typical household will be £1,000 worse off Link opens in a new window this year, says the Resolution Foundation, a 4% fall previously seen “around recessions”.
The Chancellor announced in the Spring Statement that National Insurance Contributions will be cut from 6 July meaning that a typical employee will save over £330 a year due to the National Insurance contribution threshold rising to £12,570 – matching the income tax personal allowance. However, on April 1 the 1.25 percentage point rise in National Insurance was still implemented.
According to HM Treasury 70% of people paying NIC will pay less from 6 July, even after the 1.25% point rise. And 2.2 million people will no longer have to pay NIC. Also, the Chancellor announced a 12-month temporary fuel duty cut of 5p per litre from 6pm on Wednesday 23 March.
Looking for good news
The weather is getting warmer, so cutting back on heating will feel a lot easier. For anyone really struggling, energy companies can provide grants, but you may need to get help from a debt adviser before you qualify. Your local authority might also be able to provide fuel vouchers and a discount on your council tax.
Otherwise, it’s time to supercharge your savviness. Check whether you’re entitled to benefits or grants through Citizens Advice Link opens in a new window or Turn2Us Link opens in a new window. Ditch the ready meals and takeaways in favour of home-cooked meals with cheap, versatile ingredients. Lean on your freezer and cookpot to cut out food waste. Get up to speed with your banking app Link opens in a new window as it can help you keep an eye on what you are spending. Be brutal and cancel any under-used subscriptions for fitness, entertainment, food, deliveries, or anything else.
And homeowners, cheer up! It might prove harder than expected for the Bank of England to raise interest rates as they hoped to do this year. That could mean mortgages will not, after all, be going up sharply any time soon. And other debt may not get more expensive. At least we can count on one silver lining, eh?
Our Virgin Money mobile banking app is packed full of clever tools to help you budget, top up your savings and sort out your spending.Find out more
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