Is Britain's cost-of-living crisis getting better or worse?

Improvement in the financial fortunes of ordinary people remains a long way off

In October last year, inflation peaked at 11.1 per cent and has been falling steadily since, even given a blip in February. Getty Images
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Tracey Greyvenstein, a research manager living in Britain, is not feeling any boost to her finances from improving economic trends. Instead, she is among millions of UK householders struggling with bills and debt.

“Not being able to afford to pay my mortgage and other main bills has affected my credit rating, and negatively impacts my mental health,” the 55 year old from Abingdon in Oxfordshire told The National.

“I haven't seen a difference in prices, despite the drop in inflation.”

Retailers have been promoting price freezes for months. But when Ms Greyvenstein walks out of the supermarket, she has a sinking feeling of having spent much more than she has before.

“Prices have not dropped. Supermarkets are making larger profits, even if they say that there are price matches to 'cheaper' supermarkets,” she said. “I am definitely not better off.”

Statistics suggest the pressure should be easing. Over the past few months, some indicators have been painting a brighter picture of the UK economy.

In October last year, inflation peaked at 11.1 per cent and has been falling steadily ever since, apart from February.

As a result of changes to the price cap, gas prices fell by more than a quarter in July compared to the month before, while electricity prices were 8.6 per cent lower.

Food price inflation has been coming down as well – groceries rose 0.1 per cent between June and July, compared to 2.3 per cent between the same two months in 2022, according to the Office for National Statistics. On a yearly basis, food inflation was 14.9 per cent in July, down from 17.3 per cent in June and the slowest annual growth rate since September last year.

Average wages have been going up. The ONS said wages grew at a record pace over the three months to June, with regular pay rises, excluding bonuses, reaching 7.8 per cent compared with a year earlier.

Meanwhile, Andrew Bailey, the governor of the Bank of England, hinted recently that interest rates were closer to their peak than was forecast six months ago.

That said, according to new forecasts the UK economy is set to witness the highest inflation rate of the world’s G7 advanced economies this year.

On Tuesday, the Organisation for Economic Co-operation and Development (OECD) said it expects UK inflation of 7.2 per cent for 2023, increasing its previous forecast of 6.9 per cent from June.

So, ahead of the latest inflation figures and interest rate decisions to be released this week, why are people such as Ms Greyvenstein still pessimistic about their household bills in the coming months?

'The plan is working'

When Prime Minister Rishi Sunak and his Chancellor Jeremy Hunt repeat their mantra of halving inflation by the end of this year, what they usually do not add is that falling inflation does not mean falling prices – it means that prices are going up at a slower rate.

Also, inflation, especially the core number, in the UK has proved particularly “sticky”, having been unchanged in July at 6.9 per cent. The Bank of England has employed 14 rises in interest rates to bring it down.

Those increases have played havoc with the mortgage market, particularly for those who came off two and five-year fixed-rate loans during the summer and found themselves having to remortgage at rates that added hundreds of pounds to their monthly payments.

Mr Hunt recently told the BBC that “the plan is working, inflation is coming down”.

This month, the plan may not be working as well as hoped because, as Mr Hunt admitted, August's inflation numbers could be a “blip”.

The Bank of England has predicted that August's inflation figure will be around 7.1 per cent, compared to July's 6.8 per cent, taking it further from both its 2 per cent target and the 5.3 per cent level that would be in line with the pledge to halve inflation by the end of the year.

Having fallen for some months, fuel prices have started to increase after a rise in the price of oil. PA

The August blip will be blamed on recent rises in the cost of petrol and diesel, brought on by strengthening oil prices.

The latest figures from the RAC motoring organisation show that fuel prices fell more than 6 per cent in August 2022, compared with the preceding month, while they were 4 per cent higher in July this year when compared to June.

This means that although fuel prices were lower in August this year compared to last year, the rate of price decline is not as steep, which will have a bearing on the overall inflation figures for the month.

'Devastating debt crisis'

Recent research commissioned by the charity Christians Against Poverty, found that around 28 per cent of adults said the rise in the cost of living has made them feel financially insecure.

The same proportion said they were struggling to keep up with bills, while 9 per cent now have debts that they do not know how they will repay.

The CAP report also found that about a quarter of British adults would battle to pay an unexpected £200 bill.

“Millions of households in the UK are facing a devastating debt crisis right now,” said Gareth McNab, CAP's director of external affairs. “Income is just so low for many that a financial shock like a car issue or the boiler breaking down can leave them facing spiralling debts.”

Meanwhile, a separate survey by the research firm Censuswide found that 41 per cent of people feel anxious about the cost of living on a weekly basis.

The research, which was part of a How Britain Spends report for the website TopCashback, discovered that, on average, people in the UK have £323 left in their current account the day before payday.

But 17 per cent said they have either nothing or less than nothing, meaning they are overdrawn.

The effect of more than 18 months worth of interest rate rises is reducing demand in the economy, which is what they were designed to do.

By using interest rates to reduce demand, the Bank of England is able to force inflation lower. The trouble is the policy has a long lag time. It takes anywhere between three and 12 months for an increase in interest rates to feed through to the real economy.

During that time, households suffered the dual pressures of higher borrowing costs and high inflation.

But because of the quirk in the UK mortgage market that means most borrowing is done through two or five-year fixed rate deals, many households have yet to feel the full force of the interest rate rises.

Guildford, UK. In many cases, rising interest rates have not yet been passed on to households. Bloomberg

According to the Resolution Foundation think tank, about half of the £17 billion of higher annual mortgage costs that rising interest rates have brought about has yet to be passed on to households.

Those remortgaging next year could see their annual payments rise by around £3,000.

The foundation predicts growth in real disposable income for the average household will be flat next year, with the possibility that 300,000 more people will fall into absolute poverty.

“The worst of the cost of living crisis may be behind us, but, except for those with significant savings, it is stagnant living standards rather than boomtime Britain that the immediate future has in store,” said Adam Corlett, the foundation's principal economist.

'The cost-of-living crisis is far from over'

While it could be argued that because inflation is falling, the worst of the cost of living crisis may be over, it is not yet fully in the rear-view mirror and the pressure is still very much on household budgets.

Despite having a main job and three side hustles, which include a small catering concern and trading clothes on eBay, Ms Greyvenstein is concerned about energy bills ahead of winter.

“I am very worried about the cost of energy and that, despite the drop in inflation, prices will continue to rise,” she told The National.

She's far from alone. The latest Which? Consumer Insight Tracker found that 79 per cent of mortgage owners and 81 per cent of renters are worried about housing costs, the highest level since the survey began in 2013.

The Which? survey found that 2.2 million UK households missed or defaulted on essential payments such as housing, a bill, loan or credit card payments in August.

Which? also found that 56 per cent of households in August made at least one cost of living adjustment such as dipping into savings, selling possessions or borrowing to cover essential spending, including utility bills, housing costs and food.

“I am spending less in supermarkets and trying to use up the stuff in my grocery cupboard and freezer,” Ms Greyvenstein told The National.

“I am also choosing not to buy meat and spending less on luxury items.”

Rocio Concha, Which? director of policy and advocacy said: “Although UK inflation is slowly starting to fall, these record levels of worry about housing costs and the looming threat of higher interest rates shows that for many people, the cost-of-living crisis is far from over.”

The economy has also started to stumble.

Last week, figures showed the economy shrank by a more-then-expected 0.5 per cent in July, having grown by a similar figure in June. The latest unemployment rate also came in higher than the Bank of England had predicted.

But wage growth is now outstripping inflation and looking at the three-month period to the end of July, the economy grew by 0.2 per cent.

All of this indicates that the UK is at a recessionary tipping point and that the long procession of interest rate rises is now taking its toll on the last pockets of strength in the economy, most notably the tight labour market.

“The speed of the slowdown could be indicating that recession is around the corner,” said Neil Birrell, a fund manager at Premier Miton.

“Either way, it does suggest that higher interest rates and sticky inflation are having a more significant effect on the economy.”

Some experts predicted the Bank of England might keep interest rates on hold on Thursday, even if inflation has a blip and ticks higher on Wednesday.

Others say the fact that inflation might increase slightly will convince the Bank of England's Monetary Policy Committee to raise rates by another 0.25 per cent.

Whatever the case, for ordinary citizens and households the likelihood of an improvement in their financial fortunes still seems a long way off.

Updated: September 19, 2023, 9:37 AM