By Matt Fernell, Editor-in-Chief at Finance.co.uk. Last updated 25th May 2023.
The cost of living crisis refers to the fall in ‘real’ disposable income that many of us in the UK have experienced since 2021.
What it essentially means is that the cost of everyday essentials that we need to live normal, healthy lives is rising much faster than average household incomes.
The increasing prices of essential goods and services, such as food, housing, energy, and transportation, have been making it more difficult for people to make ends meet. This has been particularly challenging for those on low incomes, who are struggling to afford basic necessities.
There isn’t just one cause of the crisis - a combination of factors has led to the situation we find ourselves in. Here’s a breakdown of the main reasons.
Inflation is the main driver of the cost of living crisis in the UK. It’s a term used to describe the general increase in prices of goods and services over time. When inflation happens, the same amount of money you have can buy you fewer things than before.
So, if the prices of the things you need to buy go up, but your income stays the same, or goes up by a smaller amount, it can become harder for you to afford those things.
When inflation is high, it puts pressure on people's budgets, because the cost of living increases, but their income may not keep up with the rising prices. This can lead to a situation where people struggle to make ends meet, especially if they are on a fixed income or have lower wages.
Over the last couple of years, inflation has been growing rapidly in the UK. We have experienced a higher rate of inflation than many other countries, meaning prices for everyday goods and services have been going up faster in the UK.
The Consumer Price Index (CPI) - the main measure of inflation - hit an eye-watering 41-year high of 11.1% in October 2022 before beginning to ease. Worryingly, it has started to creep up again from 10.1% in January to 10.4% in February this year.
Inflation in some areas is higher than in others, and one of the most worrying aspects of the cost of living crisis has been the increase in food prices. In fact, food inflation at the time of writing is at 16.8%, which is why we are seeing the cost of our weekly food shops getting higher and higher.
By energy prices we mean the amount of money you’re paying for electricity, gas, and any other forms of energy that you use to power your home, business, or vehicle.
In the UK, our energy costs have sky-rocketed over the last year or so, and this has been a real contributing factor to the cost of living crisis.
Electricity prices rose by 66.7% and gas prices by 129.4% in the 12 months to February 2023 and were some of the main drivers of the increase in the inflation rate.
With many people seeing their monthly energy bills doubling, it’s no surprise that more than three-quarters of people have cited this as the reason for the rise in their cost of living.
Here are some of the reasons we’ve seen such a steep increase in energy prices:
When energy costs are high, it can be difficult for people to afford to heat and power their homes, especially during the winter months. This can lead to a situation where people are forced to choose between paying their energy bills and other expenses, such as food and rent.
Despite rising costs, wages in the UK have not been keeping up with inflation, meaning that many people are earning less in real terms than they were a few years ago.
According to the Resolution Foundation, workers in the UK are £11,000 worse off a year after 15 years of wage stagnation.
There are lots of different reasons that have caused wages to stagnate in the UK, including:
While inflation rates are higher than the rate of wage growth, the amount of disposable income people have in their pockets will continue to go down.
How much it costs to live comfortably in the UK varies based on lots of factors like your personal circumstances and where you live.
However, there are certain expenses that are essential for most people, such as housing, food, utilities and transportation. Here is a breakdown of some of the costs associated with living comfortably in the UK:
As the above figures show, when accommodation, food, bills, and transport are taken into consideration it has become increasingly expensive to live comfortably in the UK.
If you’re struggling to make ends meet, there is help and support available to you.
One of the first things you should do is to check if you’re eligible for any government benefits if you’re not already receiving any. You might be able to claim benefits if you are:
You can use the Citizens Advice benefits calculator to check what benefits you can get, or if you can increase your current benefits.
You may also be eligible for a ‘cost of living’ payment if you’re getting certain benefits or tax credits. You don’t need to apply for this as it will be paid automatically if you’re eligible.
To help with the cost of energy, the UK government introduced the Energy Price Guarantee in October 2022. It means bills for a typical household paying by direct debit will be brought down to £2,500 a year.
This was set to rise by 20% on average on 1 April 2023, but this increase has been postponed until July this year.
Citizens Advice outlines more ways you could get help for the cost of living crisis.
There are certain things you can do yourself to help you cope with the cost of living crisis in the UK. Try these simple tips to keep your costs as low as possible:
Remember, you are not alone in facing the cost of living crisis in the UK. By taking some simple steps to manage your finances, you can help to reduce the impact of rising prices on your household budget.
The information provided does not constitute financial advice, it’s always important to do your own research to ensure a financial product is right for your circumstances. If you’re unsure you should contact an independent financial advisor.