UK struggles with cost of living crisis – August 2022
Grocery baskets felt a lot heavier for UK residents in recent weeks, as soaring inflation push prices to the highest level since 2008. Fresh food prices grew by 10.5%, as cost-push pressures from the war in Ukraine weighed heavily on farmers. In particular, higher input costs for fertiliser, wheat and vegetable oils fed through to consumer prices, who have faced a multi-pronged price attack from energy bills as well. An 80% rise in the consumer price cap will almost double a typical household’s gas and electricity bill, a price hike that is likely to agonise middle income-earners the most. While the government has urged for conservative energy use over the summer, it is likely further rebates will be needed to relieve household budget stress, especially among the most vulnerable.
Worsening financial outlooks, elevated debt and sky-high inflation pose downside risks to the economy, which have occurred at the same time as incremental rate hikes by the Bank of England. All of this is underpinned by a severe confidence risk afflicting consumers and investors.
The UK is truly in a precarious double bind. On one hand, sluggish private sector activity coupled with price pressures are crippling demand, with the Sterling plummeting to levels unseen since post-Brexit days. On the other hand, monetary tightening has been necessary to quell inflation, which peaked above 10% for the first time since 1982, while political reluctance has precluded sweeping tax cuts to support its largest consumer base. The economy could well be staring down the barrel of stagflation. If not, a lengthy recession is sure to come later in this year.