The CPI (Consumer Price Index) inflation rate hit 9.1% in May 2022. This was a 65% increase from the start of 2022 and the first time CPI inflation rate hit 9.1% in the UK since 1982! What is causing the cost-of-living crisis, and can it be mitigated?
As mentioned above, the key uncertainty spooking the markets are the high inflation rates. These are being driven by a number of factors, including supply chain problems from China, the Russia-Ukraine war and Brexit which are impacting the supply of resources including energy, food and transport.
Energy prices have gone through the roof, with crude oil at an all-time high in May 2022 since the 2008 financial crisis. The prices of oil and gas are crucial as they play a major role in global economic growth. Oil is not limited to transport, electricity and heating – huge economic factors on their own – but is also used in pharmaceuticals, fertilizers, solvents and plastics, which are all multi-billion-dollar industries.
The Russia-Ukraine war has played a significant part in the fortune of the oil markets. Russia previously supplied the European continent with 40% of its natural gas and 25% of its oil. The subsequent sanctions and ban on Russian imports sent the price of oil soaring to $109/barrel, driving inflation. However, this is not the sole culprit for the rise in energy prices as a cold winter in 2020/21, particularly in parts of Asia, saw demand for energy rocket on international wholesale markets. This had an impact on supply and consequently on prices.
Switching to renewable energy sources such as solar and wind, and maximising generation from bioenergy and nuclear, could reduce gas use by another 19bcm per year. Energy-saving measures focused on consumers and installing more heat pumps could also save 14bcm in 2022 (Energy Monitor, 2022).
Supply Chain and Brexit
Supply chain issues continue to act as a drag. China accounts for around 13% of global trade, and China’s zero tolerance approach towards Covid has led to a lockdown in the country, which has partly resulted in huge levels of shipping congestion near Chinese ports.
Logistics executives say that this global port congestion is set to continue until at least early 2023, and charterers switching to long-term contracts is the best way to manage shipping costs (Reuters, 2022). In the short term, however, this congestion has led to an increase in the cost of shipping a container from Asia to UK from £3,000 to £15,000, a massive 400% price increase that is resulting in increased costs for UK businesses and consumers.
Domestic and EU supply chains have played an equal role in the increase in the cost of living for the UK. Lorries need drivers and fuel and both have been in short supply, and when the cost of distribution increases, so too does the cost of goods on the shelves (Forbes, 2022).
The main reason for domestic and EU supply chains issues to UK is Brexit. Yes, I just mentioned the ‘B’ word – a shortage in medium and low skilled occupations like lorry drivers and agriculture picking and packing tasks as well as increased transport and distribution costs have increased the cost of living. Research by Kantar analytics found that Britons can expect to spend an additional £271 on their groceries this year. The price of groceries has increased at its fastest rate in 11 years, with food price inflation hitting 5.9% in April (Independent, 2022).
With 9.1% inflation in May 2022, the cost-of-living crisis is nowhere near its end. The UK government has announced a £15bn package of measures to help combat this autumn’s new rise in energy bills, which includes a non-repayable £400 energy bill grant, a 5p-per-litre cut in fuel duty for 12 months, 1% decrease in basic income tax from 2024 and more.
However, will this package from the UK government be enough or will the Bank of England have to further raise the interest rates to record highs? Time will tell.
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