Since inflation rose above the Bank of England’s (BoE) 2% target in May 2021, it has been steadily rising.
Consumer’s post-pandemic freedom met supply chain crises and companies struggling to repay bounce-back loans. Rising taxes, labour shortages, and then the war in Ukraine have all helped to contribute to a cost of living crisis that has left millions of UK households struggling financially.
With the BoE forecasting that inflation will exceed 13% this year, October’s sharp increase in the energy price cap will add to the woe this winter.
Keep reading for a closer look at the rising cost of living, the reasons behind it, and when we might expect prices to start falling again.
Rising inflation and increased global uncertainty created the perfect storm
In mid-2021, the UK – along with many other countries – emerged from Covid lockdowns.
As the UK economy continued its slow pandemic recovery, the World Bank forecasted global economic growth of 5.6% for 2021. The actual figure was 5.1%.
In September, the UK saw its highest annual price rise in history, as inflation rose from 2% in July to 3.2% for the 12 months to August. As inflation continued to rise, it outstripped wage increases and the value of UK consumers’ cash began to fall in real terms.
The cost of gas – already rising before Russia invaded Ukraine – has continued to skyrocket.
Disruption to global supply chains has caused a shortage in components across the manufacturing sector.
The ceasing of production in Ukraine, along with the decision of companies to pull out of Russia, has exacerbated this issue, adding to global uncertainty, as has the economic slowdown in China.
According to the Office for National Statistics, inflation for the 12 months to July 2022 stands at a 40-year high of 10.1%. This marks the first time it has hit double figures since 1982.
It is expected to peak at 13.1% later this year but could go higher.
Source: Institute for Government
The forecast comes largely from the 75% increase in the energy cap due in October, on top of the 54% increase seen in April.
The economy could take some time to recover as we enter a period of stagflation
The Resolution Foundation claimed back in March that the crisis will push 1.3 million people into absolute poverty next year. The rising cap will do nothing to help with that figure.
Meanwhile, the war in Ukraine continues and inflation looks set to keep rising.
The BoE forecast that inflation won’t return to its own 2% until late in 2024. As wage growth struggles to keep pace, households will become worse off in the short term.
Andrew Bailey, the governor of the Bank, predicts that we are heading into a period of stagflation, characterised by a recession alongside a soaring cost of living.
Tax increases could add to the squeeze
The government’s tax rises and freezes will continue to affect the disposable income you have.
2021 saw tax increases that amounted to the largest in a single year since 1993, as the government looked to claw back its coronavirus borrowing.
Then-chancellor Rishi Sunak’s spring statement wound back on some of the rises, but many of the tax and threshold freezes remain, many in place until at least 2026.
With the Income Tax Personal Allowance, the Lifetime Allowance, and the nil-rate and the residence nil-rate band all frozen, you could find yourself liable for unexpected tax over the next few years.
Professional advice can help, no matter what the future brings
At HDA, we can help you to remain financially stable during the current cost of living crisis, however long it lasts.
As the war in Ukraine continues, the main news story in UK politics is currently the Conservative party leadership race. With promises to slash taxes from both candidates, the outcome could have a huge impact on your short-term finances.
Remember though, that your financial plans are a long-term proposition based on long-term goals. Uncertainty at home and abroad will affect the global economy and the UK cost of living, but if your goals haven’t changed, your plans don’t need to either.
Whether you’re struggling to make ends meet, considering lowering pension contributions, or you need help managing your pension withdrawals, we are here for you.
Get in touch
If you’re worried about the effects of the cost of living crisis on your long-term plans, our experience in the markets could give you peace of mind and help you to regain a sense of control.
Managing your money during periods of economic uncertainty isn’t easy. Please get in touch via email at enquiries@hda-ifa.co.uk or call 01242 514563 to find out how we can help you.
Please note
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
