On the 17th of August 2022, inflation topped 10% and hit a 40-year high, and it's fair to say there is a fair amount of alarm!
With food and energy prices soaring and essential goods fast becoming unaffordable for millions across the UK, it’s clear that the cost of living has become a CRISIS that is going to get worse.
There’s no escape. This year, 8.5 million households will be looking at fuel poverty; this is the real choice between eating or heating your home - not so apparent in a summer heatwave, but when the bitter cold of winter kicks in, it’ll be quite a different story.
So what’s causing this crisis? How can we lessen the impact, and is there an end date in sight?
Punk Money Investigates.
- Inflation hit 10% in August 2022
- 87% of adults report an increase in their cost of living
- Energy bills increase by 70%
- The cost of everyday food has risen by between 6% and 7%
- 23% of adults reported finding it challenging to pay regular household bills
- UK energy bills forecast to hit £4,266 a year from January
What’s causing the crisis?
As financial hardship is hitting more and more people, ‘record numbers are now sharing in the experience - while those who were already battling are being pushed further into financial hardship, and even poverty.’
In one projection, one in three Britons – 23.5 million people – will be unable to afford the cost of living this year.
New research warned that the number of English households in fuel poverty would double to 5 million from April 1, with energy bills increasing by hundreds of pounds.
A staggering 12% of UK adults expect they will be unable to pay their current utility bills in full and will need to turn to borrowing to make ends meet.
Price increases - The rise in everyday costs, such as the price of bread, fuel, energy bills, and other everyday items, is measured by inflation. Essentially, the “cost of living crisis” means spending more on regular household costs.
Our money is worth less than last year, and wage increases can’t keep up. This is particularly felt by people already on low incomes or for those on benefits. So, for instance, even though the government has brought in a 3.1% benefit increase, this does not match inflation, which hit 10% in August.
The Covid Crisis - The covid crisis left the UK and the global economy in a state of fragility, leaving both individuals and the country ‘ill-prepared for the cost of living crisis’. This hasn’t been helped by the surge in energy demand once the world began to open up again, which in turn is contributing to the increase in energy prices.
Prices and Accessibility of Materials - Both due to covid and other world crises like the situation with Ukraine and Russia have led to an increase in the price of raw materials and supplies. So getting materials has been far harder than usual due to the escalation of transport and distribution costs, contributing to inflation and having a knock-on effect across the board.
The War in Ukraine - In a report by the Centre for Economics and Business Research (CEBR), the average UK household will experience a drop in annual income of £2553. They also found that half of this amount is a result of the invasion of Ukraine. This is due to a number of factors, but where the people are feeling it most is in the cost of fuel. The price of gas was going up before the war, and now, as Adam Scorer, chief executive of fuel poverty charity National Energy Action (NEA), says: ‘analysts suggest the war in Ukraine could drive average bills to over £3,000 per year’.
A changing climate - The weather through the winter of 2020/21 was far colder than usual, leading to high demand for energy globally. Add to that hotter temperatures in the summer with more demand for air conditioning and other cooling methods and you can see how our energy needs have increased year round.
What impact is the crisis already having on the least affluent groups?
Talking about the rise in living costs in the UK, Douglas McWilliams (CEBR deputy chairman) says, ‘We are all going to suffer, but it will hit poorer people more than the average person as they spend proportionately more on heating and food.’
Many were already struggling before but able to get by; now we’re in a situation where 15% of people in England, Wales and Northern Ireland are reported to be ‘food insecure’ meaning that they’re no longer able to eat a varied or desirable diet or have had to reduce their food intake.
“We’re seeing people who hadn’t even had to contemplate using a food bank, who might have been donating to a food bank this time last year. And it’s happening in every part of the country.” (Sabine Goodwin of Independent Food Aid Network)
The number of people going to food banks has decreased since the pandemic started, but the numbers are still far above what they were pre-pandemic.
The number of English households in fuel poverty will double to 5 million from April 1, and new research warned on Friday as Brits braced for their energy bills to increase by hundreds of pounds.
On 1 April, the 54% rise in the energy price cap hit 22 million homes. A staggering 12% of UK adults expect they will be unable to pay their current utility bills in full, given that energy bills have gone up by an average of £700 per year, which isn’t surprising.
Those who were just about managing or living paycheck to paycheck before the pandemic are likely to have built up debt during the pandemic. On top of this, rent has grown at its fastest ‘in 5 years’, and 1 in 5 people expect to see further increases in their rent over the next year. This puts renters in a vulnerable position and at risk of eviction - ‘many tenants fear challenging a rent rise will result in them being asked to leave.’
The Cost of Debt
With the cost of everything across the board rising, households are having to make ‘difficult choices’ about their spending and financial management. In figures collected by the Money Charity in June 2022, the average household credit card debt now stands at £2192, and the average ‘total unsecured debt per UK adult at £3817’.
People are having to borrow to cover basic items and prioritise their spending in ways they haven’t had to in the past, and it’s costing them. The Money Charity found that credit cards taken out at the average interest rate would take 25 years and 5 months to repay, if you make only the legal minimum repayments each month.
The charity Step Change reported a 34% increase in users between December 2021 and January 2022, with 9% citing the increase in the cost of living as one of their main reasons for debt.
The disturbing use of BNPL
According to Citizens Advice, 1 in 12 people are turning to Buy Now Pay Later (BNPL) not for luxuries but to cover essentials like goods and toiletries.
**‘It was either use BNPL or starve, so I used it’** - Audrey, a pensioner interviewed by Citizens Advice.
What’s key here is that BNPL, which we initially saw popping up as something for retail companies, is now being used as a last resource for essentials.
As Gillian Percival (a benefits caseworker at Citizens Advice Copeland in Cumbria) says: ‘Buy Now Pay Later is a double-edged sword. It can be useful if you understand what you’re getting into, but if you’re using it out of desperation, you probably have no way to repay.’
This is only likely to worsen as the cost of these essential items continues to sour. So it’s necessary to have other options available, so people don’t have to turn to loans and payment plans to tide them over for basic living costs.
With the majority of UK adults using some kind of credit - is now the time to ditch traditional borrowing for Friend to Friend lending?
Though many people from all backgrounds are struggling, on the other side, people with a steady income during the pandemic are likely to have saved up to 25% more. As positive as this may seem, it does present a concern around the disparity between the rich and poor becoming wider. You can read more on the wealth gap here.
Even though the UK’s economic recovery is gradually moving in the right direction, data from January 2022 also shows it to be slowed by other factors, including the global uncertainty caused by the war in Ukraine.
It’s one of the reasons we can see a future for Friend to Friend lending in this economic and social landscape.
Moving in this direction has the potential to make a real difference in the life of people struggling to make ends meet, preventing them from having to turn to expensive debt like payday loans or start relying on Buy-now-Pay-later options. Conversely, someone with savings in a bank account can help those around them who need it.
How could Punk Money help?
Punk Money is the UK’s first financial platform for lending between Friends, Family and Community.
It’s something we all do already, borrowing £50 ‘til friday from a mate, or, £50,000 from your folks to help buy a house from your parents. But it’s fraught with complexities and awkwardness. Difficult conversations around the payment terms get missed and repayments get forgotten which can harm relationships.
Punk Money alleviates all that by setting enabling people to set up loan agreements with people they know in under 60 seconds. The payment terms are automatically calculated so no ambiguity, the loan contracts are legally binding and the repayments are made automatically according to the terms you’ve agreed so no chasing up missed payments. Better still, there’s no credit check so anyone can apply and repayments will go towards building your credit score. It is simply brilliant for young people, new arrivals to the country and people with less than perfect credit scores.
The icing on the cake is that the terms of the loans and interest rate are set by the individuals involved, starting from 0% with an upper limit of 10% meaning it’s no use for loan sharks but you can keep up with inflation.
- Bloomberg - U.K.’s Wealth Gap and Housing Costs Risk Civil Unrest, L’Atelier BNP Says
- Forbes - Navigating The Cost Of Living Crisis
- Institute for Government - Cost of living crisis
- UK Parliament - Rising cost of living in the UK
- ONS - The rising cost of living and its impact on individuals in Great Britain: November 2021 to March 2022
- Financial Times - No easy solution to UK cost of living crisis
- Evening Standard - Cost of living crisis: Price of household items ‘has surged by nearly 50% since 2020’
- Numbeo - Cost of Living in United Kingdom
- Liverpool World - Cost of living crisis: these basic household items have rocketed in price over the past year
- StepChange - Monthly client data report: January 2022
- ONS - UK economy latest
- ONS - Local statistics