Explained: What Is The Cost Of Living Crisis?

While health experts declare the “end is in sight” for the Covid pandemic, a fresh crisis now looms heavy over the UK government.

MPs are increasingly worried about an issue dubbed the “cost of living crisis”, created by a perfect storm of rocketing bills and tax rises.

In a stark warning, some economists have said incomes could be hit even harder than during the financial crash of 2008.

What it means is Brits can expect to feel the pinch, with poorer households hit the hardest.

Here, HuffPost UK talks you through the why, what and how as well as Tory concerns and Labour’s proposed solutions. 

Bills, Bills, Bills

Households are already feeling the squeeze and that is before soaring energy prices and the National Insurance hike – which comes into force in April.

Covid-19 hit global supply chains with pent-up demand, shipping delays, factories in lockdown and staff absences. This has led to prices rising, particularly for raw materials.

Food prices have also risen due to supply chain disruptions and increased HGV driver wages after thousands left the UK for their home countries in the EU.

Meanwhile, energy bills are expected to soar as the government’s price cap is revised in February and implemented in April.

The wholesale price of gas spiked at the end of 2021 because of high demand around the world. 

Experts predict the energy regulator Ofgem may raise the price cap by more than 50 per cent this year, taking the average annual bill to nearly £2,000.

Campaigners and MPs have called on the government to remove the 5 per cent VAT rate on power but even if this is done, many households will still be pushed into fuel poverty.

Public concerns were also laid bare in a new poll that revealed one third of Brits fear they will be unable to pay their energy bills this year.  

A YouGov survey published by The Times found 33 per cent of people expect their fuel bills to become unaffordable in 2022.  

High Energy Costs

Boris Johnson has said he is “constantly” meeting with chancellor Rishi Sunak, hinting that the government is on the verge of taking action. 

He told journalists on Monday that he understood how “difficult it is” and they were “looking at what we can do”.

HuffPost UK also understands the chancellor will meet with Tory backbenchers over three evenings this week to hear their concerns. 

Meanwhile, communities secretary Michael Gove said government support on energy bills should be targeted at “those most in need”.

He said it was “important that we look at a range of options” for helping struggling families but that “we should be concentrating our support most on those with the least income”.

Inflation 

Inflation is the rate at which prices are rising – if the cost of a £1 packet of donuts rises by 5p, then the inflation is 5 per cent. 

You might not notice changing levels of inflation immediately, but in the long term these price rises can have a big impact on how much you can buy with your money.

Consumers are already experiencing some big price hikes with inflation increasing to more than 5 per cent as of November, well ahead of wage growth.

The Bank of England predicts inflation could rise as high as 7 per cent — a level not seen since 1991.

One of the biggest causes of the inflation has been high energy bills, with the wholesale cost of gas spiking globally.

As Johnson said on Monday: “Energy is just one component of the problem. There’s a general inflationary pressure caused by the world economy coming back from Covid. And in the US, I think inflation is likely to be the highest it’s been since the early 1980s. The Eurozone is experiencing exactly the same thing.”

Tax Rises 

Sunak has set Britain on a path to its highest overall tax burden since 1950 with the National Insurance hike kicking off in the Spring. 

Sunak and Johnson are under pressure to scrap the £12 billion a year increase – intended to fund the NHS and social care – amid concerns for those struggling with the cost of living.

Jacob Rees-Mogg, leader of the House of Commons, reportedly told the cabinet that the rise could not be justified at a time of rising inflation and soaring energy bills.

Meanwhile, some economists say Sunak’s desire to “balance the books” by increasing taxes when the economy is strained could risk choking off the UK’s recovery.

It also comes as Sunak was accused of introducing an £11 billion “stealth tax” after it emerged that more than one million people would be forced to pay the higher rate of income tax by 2026. 

By freezing income tax thresholds, 1.2 million more people will be dragged into the 40p tax band as a result of inflation. The higher rate of income tax starts at £50,070. An additional 1.5 million low earners will be captured by the basic 20p rate, which starts at £12,570.

Standard Of Living 

All of the factors above contribute to the cost of living crisis. As well as increasing energy and food prices, other areas of our lives will continue to feel pressure.

They include house prices which are have continued to increase due to shortages, the stamp duty holiday and competitive mortgage rates.

Renters are also facing higher costs, with rents increasing by an average of 1.7 per cent in the 12 months to November, according to the ONS. It is expected this will continue to increase. 

Mortgage rates are expected to rise this year as well as increasing council taxes in authorities up and down the country. The price of petrol remains high and the cost of furniture has shot up due to the rising cost of materials and HGV shortages.

Meanwhile, food banks fear they could be forced to turn away hungry families or cut back packages amid growing demand. 

Tory Warnings 

Tories are demanding Johnson takes action to tackle rising energy bills, spiking inflation and to scrap the planned increase in National Insurance.

Johnson’s former Brexit minister, who recently quit over the political direction of the government, has warned he risks losing the next election unless he returns to Tory values of “free markets, free debate and low taxes”.

Tory MP Tobias Ellwood urged Sunak to find temporary and long-term solutions to the cost and security of energy supply and Julian Knight MP said Johnson needs to “wake up” and listen to his party on energy. 

Knight said in the short-term, Johnson needs to abolish the VAT on energy bills and get rid of the green taxes – a call echoed by other colleagues. 

Even presenter Piers Morgan wrote in The Sun that Johnson should stop being a “shambles” or quit.

Meanwhile, Tory Tees Valley mayor Ben Houchen said No10 needs to focus on levelling up: “It’s time for the prime minister to focus, remember what got him elected two years ago and what the British people need to see to return him as prime minister at the next election.”

The Labour Party 

Labour has unveiled its own proposals for tackling energy price rises, which include scrapping VAT on bills and introducing a windfall tax on North Sea oil producers. 

They claim the measures could save the average family £200, rising to £600 for those on low incomes.

Shadow chancellor Rachel Reeves said: “The prime minister was the biggest advocate for cutting VAT on gas and electricity bills during the referendum.

“But now when cutting those bills would make more difference than ever, the prime minister says no. Well, I say that bills can’t be paid on broken promises.”

However, the government has so far resisted making moves on VAT, and education secretary Nadhim Zahawi said oil and gas companies were “already struggling”.