The cost of living for UK residents has been steadily increasing since the beginning of 2021. At 5.5%, inflation hit its highest rate in 30 years in January 2022, with households having to tighten their purse strings when it came to buying goods and services.
The latest government report, Rising Cost of Living in the UK, published in March, offers insights into why living costs are increasing and estimates when this might stop. Following two years affected by the Covid pandemic, the current conflict in Ukraine has also taken its toll on the global economy.
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Causes of rising living costs
A significant driver of inflation, the Russian invasion of Ukraine is pushing energy prices even higher. Domestic gas prices had already increased by 28% and domestic electricity prices by 19% in the 12 months leading up to January 2022.
The energy regulator, Ofcom, announced in February that the domestic energy price cap was to increase in April from its annual level of £1,277 to £1,971 – that’s a significant increase of 54%.
In addition to the humanitarian, military and political impact of the ongoing conflict in Ukraine, there are major implications for the global economy. The most important economic effect in the UK is higher energy prices.
Due to oil and gas prices on the international market climbing sharply following the invasion, rising petrol costs are also driving inflation upwards.
The cost of other products has also risen, as Ukraine and Russia are large producers and exporters of agricultural products, including wheat and some metals. The price hikes on these products could lead to more increases in the costs of materials and foods in Britain.
Forecasts for inflation
Before the Ukraine conflict, economists forecasted that inflation would peak in April 2022, when the new price cap came into effect on household energy bills in Britain. The Bank of England predicted the CPI inflation rate would peak at 7.25% and then ease slightly as the year progressed.
Since the Ukraine war began, many commodities markets have suffered price rises, leading economists to increase their forecasts for inflation, in both the near and long-term.
The think tank, the National Institute for Economic and Social Research, published new forecasts at the beginning of March suggesting inflation in Britain would peak at 8.1% in the third quarter of 2022. Although it will depend on the prices of energy amongst other things, some economists believe inflation could hit a whopping 10% at this time.
Depending on various factors, most notably the Ukraine conflict, the Bank of England cautiously predicts that the inflation rate is expected to drop over the next couple of years, following its peak in the third quarter of this year. It anticipates inflation may be around the 2% target in three years’ time.
What help will the government provide?
Chancellor Rishi Sunak has announced some government support for struggling consumers. These include a £200 energy bill loan later in the year, to be paid back later in instalments. There will also be a £150 Council Tax rebate that won’t have to be paid back. The Warm Home Discount scheme is to be expanded, allowing some low-income families to get money off their energy bills in the form of a one-off payment.
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