Image Credit: Pippa Fowles
Britain is set to face a ‘perfect storm’ of hardship this year with the rate of inflation at its highest in nearly three decades. The cost of living for families across the country is due to spiral in 2022 with real terms pay eroded and household bills rising . Yet in spite of this, the government appears lost in action, resisting calls to intervene. The question is what effect will this have on the government in the months to come?
Figures from the Office for National Statistics show that the Consumer Price Index (CPI), one of the main measures of inflation, rose to 5.4 percent in the twelve months to December 2021. This is the highest rate since March 1992, up from a previous ten-year high in November 2021 where inflation stood at 5.1 percent.
Soaring prices are largely down the Covid-19 pandemic which caused immense disruption to business and industry by means of shutdowns. This has created prolonged supply-side problems, as manufacturers face intermittent closures and struggle to keep pace with post-pandemic consumer demand. The shortage of HGV drivers has further exacerbated problems as goods have been unable to reach the shelves.
The British Chambers of Commerce say three in five firms are set to raise their prices during 2022, with retail analysts such as Kantar estimating that food bills for British shoppers are now increasing by £15 a month. There has already been a huge increase in food bills with the Trussell Trust, one of the UK’s largest food bank networks, delivering a record 2.5 million emergency food parcels in the year 2020/2021 as families rely ever more on food banks.
Rising energy costs is a huge concern for British householders too, as the wholesale price of gas and electricity has increased dramatically during 2021. Higher demand during the previous winter and a relatively windless summer has depleted stored gas supplies. While British consumers have been somewhat protected from this turmoil due to the energy price cap set by Ofgem, the cap was increased by 12 percent last October and is predicted to rise by 51 percent in April, adding around £600 per year to the average bill. According to the Institute for Fiscal Studies (IFS), this would regressively harm lower income households the most who spend almost three times as much of their budgets on gas and electricity as the highest-income households.
Housing costs also pose grave concerns to householders, with mortgage repayments and rental costs already rising amid Britain’s pandemic property boom. Last month the Bank of England raised the base rate of interest from 0.1 percent to 0.25 percent in a bid to curtail rising inflation, meaning homeowners with variable rate mortgages face an increase of between £10 and £15 on typical monthly repayments.
The average monthly rental cost also rose by 8.3 percent last year while a study by Paragon Bank found that the typical renter pays about a third of their annual income on rent. This makes the concurrent rise in both rent and energy particularly alarming for those yet to step foot on the property ladder of home ownership.
On the flip side, the mounting cost of living has coincided with deteriorating pay. The Office for Budget Responsibility and the Resolution Foundation estimate that real terms disposable income will rise by just 0.5 percent across the current Parliament, the lowest growth on record. Even the 2010 coalition government managed to achieve over 6 percent despite their policy of austerity.
There has also been outrage at the government’s decision to increase National Insurance contributions by 1.25 percent in April to help tackle NHS backlogs and improve social care, costing the average worker an extra £255 a year. Current plans would see this rise embodied in a Health and Social Care Levy implemented in 2023, with many questioning this ill-timed raid on incomes when workers face bleak times ahead.
Meanwhile the government has defied demands for larger welfare payments in April, with benefits only being upped by the CPI rate in the year to September 2021 which was 3.1 percent despite the Bank of England predicting inflation will reach 6 percent. This will mean the 10 million households in receipt of these benefits would be £290 per year worse off if the government does not reconsider.
Indeed the critical question is how this ‘perfect storm’ will impact the government in 2022. Boris Johnson’s remarkable success in the 2019 General Election, which saw the Conservative Party gain many working class ‘Red Wall’ seats, may be reversed. The Tories have already seen unprecedented losses in the North Shropshire and Chesham and Amersham by-elections, while real term cuts in welfare support and disposable income could send their new working class supporters back to the Labour Party at the next election.
Moreover Boris Johnson also faces an internal rebellion in his own party. While there has been fury over allegations of Covid-breaching parties in Downing Street and suspicions over who funded the refurbishment of the Prime Minister’s flat, senior Conservative figures such as Jacob Rees-Mogg have criticised the planned rise in National Insurance with the spotlight gradually shifting towards much more pressing matters.
One mitigating factor is that soaring inflation is a global problem as opposed to a British one, given nearly all countries have faced similar supply-side issues resulting from the pandemic. Despite this, inflation is nearing three times the target rate while the Bank of England shows signs of pulling the plug on a decade of low interest rates. We have already witnessed big increases in food and energy bills recently, with this trend set to continue into 2022. The government’s response so far has been an ill-timed tax hike, albeit to fund vital public health services. However the current lack of joined-up governance looks set to cause serious woes for the Conservative Party if they fail to tackle the cost of living crisis.