The cost of living crisis has wreaked havoc on the economy with the UK currently experiencing the highest inflation rate in over 40 years and the biggest drop in living standards in over 60 years.
But with so much financial and political jargon being thrown around and updates emerging on a daily basis, it can be difficult to know what costs have increased, and, more importantly, why.
We know more than anyone how bleak the situation has become and how difficult it can be to keep track of it all so we’ve put together a helpful guide to help you navigate all things cost of living crisis, from what it is, why it’s happening and what you can do about it.
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What is the cost of living crisis?
The cost of living crisis describes the ongoing period where the cost of everyday essentials, such as energy, food and fuel, has been rising faster than the average income (the average household’s disposable income has dropped by 16.5% year-on-year).
This has been marked by rising inflation which is, essentially, the measure of how much consumer prices have risen in the past 12 months. The current rate is 9.9% which is 0.2% down from last month’s figure of 10.1% – the highest since 1982.
However, because interest rates are falling below the rate of inflation, people’s income and savings are no longer growing at the same rate as the price of essential goods and services and are losing value in real terms.
It has also been exacerbated by record-breaking energy price hikes and higher-than-normal fuel costs as a combination of factors continue to drive the worst cost of living crisis in a generation.
What has caused the cost of living crisis?
The underlying cause of the cost of living crisis is a combination of rising inflation and low wage growth but there are several other factors that have contributed to worsening conditions across the board.
The Russia-Ukraine conflict, for example, is fuelling the cost of living crisis across the continent with a recent YouGov poll revealing that 83% of families in Spain, 76% in Italy, 66% in France and 66% in Denmark have reported a noticeable rise in day-to-day costs this year.
However, the UK is in a particularly vulnerable position due to the fallout of Brexit and the COVID-19 pandemic which has resulted in supply shortages for consumer goods and services.
What prices have risen due to the cost of living crisis?
The cost of living crisis has sent the price of almost everything through the roof and it’s difficult to find a good or service in the UK that hasn’t been impacted by rising inflation.
The most noticeable change has been the cost of electricity, gas and fuel with the energy price cap – which was originally introduced in 2019 – rising from £1,042 to £1,971 between August 2020 and April 2022 alone.
In September, the government provided short-term relief for millions of households up and down the country when it announced it would be freezing the energy price cap at £2,500 from October until 2024. This is an increase from the current £1,971 cap but a decrease from the £3,549 cap it was set to increase to.
Another noticeable price hike is essential food items with milk experiencing a 34% increase, butter rising by 27.1% and olive oil surging by 23.6% in the 12 months to June 2022.
How have people been impacted by the cost of living crisis?
The cost of living crisis is, understandably, having a knock-on effect on people’s personal finances with rising inflation meaning the pound in their pocket is worth much less than it was just a matter of months ago.
According to data collected from the Opinions and Lifestyle Survey between 20 and 31 July 2022, for example, 57% (26 million) of people are spending less on non-essential items, 51% (24 million) are using less gas and electricity in their homes and 42% (19 million) are only using their car when it’s absolutely necessary.
There is also growing concern that this winter could plunge millions of people into fuel poverty with households already struggling to make ends meet and some left with no choice but to just pay what they can afford on their energy bills.
The timing of the cost of living crisis in the aftermath of a global pandemic has also meant that some people have seen their social lives come to a dramatic halt as restaurants, bars and cinema trips become increasingly unnecessary and unaffordable.
Will the cost of living crisis get worse?
The cost of living crisis has been getting worse since mid-2021 and, according to experts, is likely to last until late 2023 at the earliest.
However, 2022 is likely to be remembered as the worst year on record for the cost of living crisis and, in particular, the sharpest drop in household incomes on record.
The government has introduced a series of measures to tackle the cost of living crisis but with current figures still far below where they were this time last year, millions of households are still expected to struggle with rising costs and, for some, become buried under their debts.
It is also worth remembering that, whilst the economy is set to return to normal during the tail-end of 2023, it could be late 2024 until the cost of living decreases and the impact of these changes are felt by the consumer.
Still confused? Our cost of living crisis guide covers everything you need to know about the cost of living crisis and what support is available to help you tackle further price rises this winter.
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