The UK’s Cost of Living Crisis: Inflation Stuck in Double Digits

I have written many articles about the UK economy over the last few months. It was a turbulent time for the country, especially last October when ex-Prime Minister Lizz Truss’ disastrous budget plan nearly bankrupted the country (a full account of that debacle here).

But while the rest of the world has at least made some headway, it feels like the UK is still stuck in an economic quagmire. Nothing shows this more clearly than the inflation rate, which is still stubbornly in the double digits.

With an inflation rate of 10.1% in March, the cost of living crisis is not abating.

The word crisis is shamelessly overused in economics, but make no mistake, the UK’s cost of living crisis is exactly that.

Compared to other European countries, it gets even worse. While the region has been rocked by inflation over the past year, fueled by the Ukraine war, pandemic liquidity injections and supply chain issues, price increases have moderated in most countries in recent months.

But not for the UK, which is still in the double digits and is now among the worst in Western Europe.

Inflation is not equally punishing

Huw Pill, chief economist at the Bank of England, said last week that the UK “must accept that it’s getting worse,” a remark that understandably struck a chord with much of the public.

“You don’t have to be a great economist to realize that if what you’re buying has gone up relative to what you’re selling, you’re worse off,” he said, citing the impact of increased energy costs as that United Kingdom is a large importer of natural gas.

For some, the situation is worse than the numbers suggest, and many complain that the impact on the ground is far worse than official measurements. This gets to the heart of the issue and what I’ve written about at length over the past year: Inflation is such a pernicious problem because it hits the poor harder than the rich.

Those at the bottom have no assets to protect themselves. As risk assets declined in 2022, the pandemic price boom saw meteoric gains. Not only that, the UK FTSE 100 is near its all-time high (read a full report here). A weaker pound (75% of earnings come from abroad) and rising energy prices (the index is commodity-heavy and excludes tech stocks) have had a positive impact.

So asset owners have been isolated by the price hikes of the past few years, while at the same time spending a smaller proportion of their income on items like food and energy, which have been particularly hard hit. And then there is housing. Despite moderating somewhat in the last quarter, the housing market has spiraled out of control in recent years, widening the gap between renters and homeowners.

CPI criticized as a measure of inflation

Another issue is the measurement itself, the CPI, which some consider unrepresentative.

I wrote an article about this debate last year. In short, CPI is calculated by evaluating the price of a basket of goods and services from one time period to another. That is, it measures the eroding purchasing power of a dollar (or pound in this case) rather than a person. High-income individuals spend more, which means they carry a larger weight in the index.

Therefore, every dollar is a vote, not every person, and this can contribute to the feeling that the index is not representative of certain populations.

An example of an alternative measure is through the company Truflationwhich says it needs “millions of data points”, compared to the UK Office for National Statistics’ approach, which only used “hundreds of thousands”.

Inflation in the UK is currently 15.5%, well above the official 10.1%.

“The biggest influence (on the difference in inflation figures) is the housing category. Here our number is higher than the ONS, and that’s because our data includes mortgage repayments. In recent months, the residential category has experienced a slowdown in terms of year-on-year growth rate,” says Oliver Rust, Head of Product.

What’s next for the UK?

Whichever way you look at it, inflation is extraordinarily high and many people in the UK are suffering as a result.

On the plus side, it finally feels like things are at least starting to stabilize. Inflation remains high, but there is growing optimism that at least it has peaked and inflation will soon start to fall, as in the rest of Europe. However, the rate is so far above central banks’ usual 2% target that the difficult times will not be over anytime soon.

As for politics, Rishi Sunak has been in office for six months and the chaos of Lizz Truss’ 49-day reign and disastrous budget are finally behind him. Things have at least become somewhat more stable and both the rest of Europe and the US have had a relatively positive quarter when looking at most economic metrics.

But the UK is no longer part of the EU and is feeling the burden of having to contend with the bloc and the US individually. It’s a large economy, but nowhere near as powerful as the US, and it’s felt the strain as it adjusts to a post-Brexit world.

The energy crisis has hit the UK hard as a major importer and it has become very clear that the UK’s decision to leave Europe was a major setback, at least in economic terms. Things can only get better in the future as the country reels and tries to find its place in the new economic order. But the solution isn’t easy, and it won’t be quick.