Inflation has risen to 9 percent – the highest in 40 years. Prices are rising faster than wages on average, which means people’s living standards will fall this year.
Average wages excluding bonuses rose 4.2 percent in the three months to the end of March.
Around nine in ten (87 per cent) of adults in the UK reported that their cost of living went up in March alone.
What causes the cost of living stand up?
Energy prices have been a key inflationary driver as oil and gas supplies have become tight while demand rises as the world weathers the pandemic.
Rising energy costs have led to higher household bills, putting pressure on households and driving up the headline inflation rate.
Russia’s invasion of Ukraine has further pushed prices higher, as Russia is Europe’s largest gas supplier and one of the world’s largest oil exporters.
The sanctions imposed on Russia have exacerbated the supply problems. This comes after a widespread disruption in shipments of goods caused by the pandemic.
Petrol and diesel prices in the UK rose to a new record this week.
Statistics from data company Experian Catalist show that the average cost of a liter of petrol was 167.6p per liter, while diesel averaged 180.9p.
Compared to a year ago when petrol averaged 128.38 liters and diesel 130.80p, the cost of filling the typical 55 liter tank has gone from £70.61 to £92.20 for petrol and from £71.94 increased to £99.48 for diesel.
How much have energy prices increased?
The energy price cap, which sets the maximum rate most people will pay for their household electricity and gas, rose 12 percent last October and 54 percent in April this year.
A household using an average amount of energy now pays £1,971 on its dual-fuel bill, according to Ofgem’s calculations. That’s £693 more per year than last year. Those with prepayment meters pay an average of £2,070.
Prices are expected to rise again when Ofgem changes its price cap in October this year, with experts predicting the average bill will reach £2,600 a year.
The government has offered a £150 tax break to people in houses in bands A to D. The discount will be applied to direct debits from April. Households not using direct debit should speak to their municipality.
A £200 reduction on energy bills is to be applied from October. Then the government measure was criticized for not targeting those most in need and for being repaid through a levy on bills for the next five years.
If you are having trouble paying your energy bill, you should speak to your supplier and ask for help. Citizens Advice can also help.
What will be even more expensive?
A rise in energy prices raises the cost of a whole range of goods by raising the cost of production and transportation.
Most worryingly, food costs are also rising sharply. The latest official data shows that food prices rose 5.9 percent last year, with further increases expected in the coming months.
Here, too, the war in Ukraine had a major impact. Russia and Ukraine are leading suppliers of important raw materials, especially wheat and sunflower oil. This has led to a rise in the price of margarine and a range of other processed foods.
A sharp drop in supplies has prompted some countries to protect their home markets, which could further impact prices. This week India banned the export of wheat. Indonesia, a major producer of palm oil, recently blocked exports of the product.
The price of used cars has risen 27 percent over the past year, due to shortages of key parts for new cars, such as microchips.
How long will the cost pressure last?
The Bank of England expects inflation to peak at 10.25 percent in October as energy bills start to rise again.
This will likely be much faster than average wage increases, meaning people will be able to afford fewer goods and services.
The bank forecasts that pressure on the cost of living will ease over the next year as inflation falls sharply.
However, there are many uncertainties in these calculations, not least the outcome of the war in Ukraine and the further course of the Covid pandemic.
The bank expects energy prices to remain higher than before the pandemic at least until the end of 2024. She expects economic growth to remain just above zero, meaning average households are unlikely to see any significant easing of the financial pressures they’re facing at some point.
What about the interest?
Interest rates are rising because they are seen as an important means of curbing price increases. There is hope that the increase in the cost of borrowing will help cool the economy.
The cost of borrowing for people with adjustable rate mortgages has increased and most analysts expect further increases in the future.
The bank’s governor, Andrew Bailey, has conceded that rising interest rates will do little to address the root causes of rising living costs, such as high energy prices.
Rising interest rates are expected to cool the overheated UK property market, which has seen the average UK house price rise by £24,000 to £278,000 in March 2022.
https://www.independent.co.uk/news/business/inflation-9-finances-explained-b2081701.html Inflation hits 9%: How is it affecting your finances?