As the days grow darker, so too does the mood in the UK as we head into yet another punishing winter. Things are grim. No sooner had we started to reclaim some semblance of normalcy from the jaws of COVID – which, FYI, is still very much around – than the cost of living crisis hit.
Today you can expect to shell out a lot more on absolutely everything than you did a year ago as prices rise faster than they have for 40 years. Food costs are soaring, with prices in shops rising by 5.1 percent in August, or for fresh food specifically, 10.5 percent – the highest rate seen since 2008.
Meanwhile, the cost of keeping our homes warm has skyrocketed. Liz Truss’s promise to blanket freeze energy bills at £2,500 a year from 1 October to 2024 might prevent households from paying the £3,549 originally set by the Ofgem energy price cap, but it still means paying considerably more than we have been. Pre-payment meter customers, for example, will need to find £264 in cash for January’s energy alone, according to Resolution Foundation analysis.
Aside from the cost of food and utility bills, the price of non-essentials is also climbing. Even Panini football sticker albums aren’t immune to price hikes. Filling the World Cup album for Qatar 2022 will cost about £870, with each sticker pack coming in at 90p, up from the 80p they cost for the Russia 2018 version and the 50p for Euro 2016. Thanks a bunch, inflation.
But what exactly is inflation, and how have we found ourselves in this hellish situation? We spoke with the experts to help us make sense of it all.
What exactly is inflation?
Inflation is the general increase in the price level of something, says David Spencer, a professor of economics and political economy at the University of Leeds.
Overall, UK inflation climbed above 10 percent for the first time in four decades when it reached 10.1 percent in the year to July before easing slightly to 9.9 percent in August. Goldman Sachs had predicted it could continue to soar to 22 percent next year.
But, says Morten O. Ravn, a professor of economics at University College London, there’s an important distinction between the cost of living crisis and inflation.
“Usually, the way we think about inflation also includes the rate of increase in wages,” he explains. “What’s going on right now is that the prices of the things we buy are going up but not our income. What we can buy with our salaries is going down. Pure inflation would also be our salaries going up at the same rate. So that’s why this [situation we’re in] is more a cost of living crisis than pure inflation.”
How is inflation calculated?
Inflation can be measured using several methods, but the most commonly used is the price percentage change over time of a sample of goods and services in an imaginary “shopping basket”.
“The contents of the basket are defined to be the types of things people in the UK buy,” says Kevin Albertson, a professor of economics at Manchester Metropolitan University. “The price changes are combined together by weighting all of the individual price changes by how important those items are to UK consumers. For example, if we buy twice as much chocolate as we do carrots, then the price changes in chocolate are twice as important as the price changes in carrots, and hence have twice the weight in combining the overall index.”
Why is inflation so high now?
Several factors are at play here, including the high cost of food, oil and gas and other fuels. But as for the reasons behind that, Brigitte Granville, a professor of international economics and economic policy at Queen Mary University of London, names the COVID pandemic and lockdowns, Russia’s war in Ukraine, the resulting economic sanctions and disruption to global supply chains among them.
Ravn adds that a “Brexit effect” is likely contributing to price increases in the UK too. Among the outcomes of Brexit is the declining value of the pound, which slumped to a 37-year low last Friday. As the value of sterling goes down, the price of everything Britain imports is going up, Ravn explains, and “the loss of value of sterling is feeding inflation in the UK”.
Granville goes on to explain the role scarcity of essential commodities plays in rising prices and, thus, inflation. “Economics is based on scarcity, so when something is rare, it costs a lot of money because a lot of people want it.”
Albertson adds that the world is running short on resources in general, meaning that what we do have has to be rationed. The result is sobering. “As prices increase faster than wages, those people who do not earn very much money are forced out of the market, and so, therefore, those people who have the most money can buy what they want. This is obviously not very fair, but that is the way that markets work,” he says.
But I’ve not had a pay rise!! Why are wages not rising in line with inflation?
The simple answer to this is that not all workers have the power to raise wages, says David Spencer, a professor of economics and political economy at the University of Leeds. That is why many people face falling real wages. “Power is skewed towards employers, not workers, in the UK at least,” he says.
How will all this affect me?
Albertson’s earlier comments might have already given you some idea, but there’s more.
“It’s going to be catastrophic,” Granville warns. “Before, in the 70s, we used to have what is called wage-adjusted inflation, so wages were adjusted to inflation. It was bad because that meant you could never get rid of inflation, but at least people could live. Now we don’t have that. So, what does that mean? That means that in real terms, for instance, let’s imagine you bought a kilo of sugar last week and it cost £3, now the same kilo of sugar is going to be £10, but your salary has not changed.”
Albertson agrees that most people in the UK will see their quality of life deteriorate in the short term, but he has some hope for young people. “In the long term, young people have a longer run than people of my age, and we may hope that things will improve,” he says. “This is because technology may improve the efficiency of the energy which we may access. That is to say, we may require less energy to maintain a quality of life.”
But that requires action, and now.
“In the same way that governments got involved in searching for a vaccine for COVID, governments have to take the lead in developing sustainable technology,” Albertson says. “In the meantime, they also have to take the lead in making sure those people who need the most help get the most help.”
How am I meant to live like this, exactly?
In short, as simply and sustainably as possible, says Albertson.
But, ultimately, the responsibility doesn’t really lie with us regular people on the ground to sort out this situation. Ravn says: “It’s down to the Treasury and the chancellor to intervene with policies that allow people to cope somehow. That would be particular tax policies for poorer people and better income distribution. If we spent on income distribution, we would be able to [ensure quality of life] for poorer people and beat inflation, so it’s much better to introduce targeted policies.”
How the hell did we get into this mess?
Albertson points to governments worldwide and how they have bought into the idea that economic growth can be perpetuated for ever. But that isn’t strictly realistic without action.
“This requires ever-improving technology, given that we have a standard stock of resources,” Albertson explains. “Lately, technological improvements have not been sufficient to offset the decline in our stock of resources. Therefore, demand is greater than supply for the current level of output.”
Is there any hope at all?
There is always hope, reassures Spencer. “The economy can be reformed in ways that allow the majority to flourish,” he says. “We have got through inflationary episodes in the past. The key is to ensure that lower inflation is not at the expense of higher unemployment.”