In Depth

Soaring inflation: the cost of living crunch

Britain’s economic prospects were dire enough before Putin’s war – ‘now they are desperate’

Britain’s economic prospects were dire enough before “Putin’s murderous war”, said Will Hutton in The Observer – with rising infation, rocketing energy bills and new taxes to pay for Covid measures. “Now they are desperate.” Russia is the world’s largest exporter of gas and wheat, and one of the largest exporters of oil and sunfower oil. Ukraine is the world’s fifth largest exporter of wheat and the fourth largest of maize. Inevitably, the prices of all these commodities have “spiralled upwards”. Oil has already doubled over the year to $130 a barrel. Past oil hikes on this scale “have unfailingly triggered global recessions”. The cost of living will keep going up. Inflation is expected to top 9% by autumn. “Everything that might propel growth is being squeezed”: consumer spending, government spending, investment. “You have to go back 50 years” to the 1970s to see “every dial on the economic dashboard” flashing red in this way.

The effect on household costs will be drastic, said Rupert Harrison in the London Evening Standard. Two years ago, the average dual fuel energy bill was under £1,000 per year. The cheapest one-year x is now £4,000, and could easily go over £6,000. “These are incredible numbers”, on top of rising prices for “motoring, food and most other things you can think of”. Next week, Chancellor Rishi Sunak will give his spring statement mini-budget, said Robert Peston in The Spectator. It’s not clear that the Government “has quite yet grasped the scale of the economic challenge”. It has so far set aside £9bn to ease the pain of energy price rises; that represents a subsidy of just £350 per household. The current crisis is quite different from the impact of Covid, because that was temporary, whereas “the reconfiguration of the global economy forced by the invasion of Ukraine will be permanent”.

The danger is that Sunak will react with his usual brand of watered-down Thatcherism, said The Guardian. What he needs to do is protect household nances, particularly poorer families – with uprated benets, a raised minimum wage, and a windfall tax on oil companies to fund lower energy bills. The trouble is that increased government spending “is one of the main ways to fuel inflation”, said Robert Colvile in The Sunday Times. “That’s what happened in the 1970s.” He’d do far better to scrap next month’s planned national insurance rise, which will see taxpayers forking out an extra £12bn. Whatever he does, Sunak faces “an awful choice between compassion and prudence”. Short-term pain for households is better than “galloping inflation”.

Doughnuts

Getty Images

Basket of goods: doughnuts and men’s suits are out 

Changes to the basket of goods used by the Office for National Statistics to measure prices are always an interesting gauge of trends. This year, doughnuts, men’s suits, coal and atlases are out, noted Lora Jones on BBC Business – replaced by sports bras, meat-free sausages, antibacterial wipes and pet collars. With inflation at its highest in 30 years, “the ONS’s methodology has come under extra scrutiny”. As analyst Myron Jobson of Interactive Investor points out, “climbing sessions”, another new addition, are “unlikely to rank highly on the list of spending priorities among those struggling to make ends meet”.

“Forget number-crunching,” said Alistair Osborne in The Times. Fashion advice has long been “the key forte” of the ONS. “And once again, the wonks haven’t disappointed.” After 75 years, they’ve killed off men’s suits – reflecting a fall in sales from five million to two million a year over the past decade, according to Kantar, accelerated by “trackie-bottomed working from home”. 

“The death of the doughnut is no great loss,” said Nils Pratley in The Guardian – apparently these days we’re feasting on multi-packs of cakes. “But it’s hard to believe the men’s suit will go without a fight “once working-from-home effects fade”. Think of its return to the basket as an “unofficial marker of the economy’s recovery to post-Covid normality”. I give it 18 months.

Wheat production in Ukraine

Wheat production in Ukraine

Alexander Reka/TASS via Getty Images

The rising cost of everyday foods 

As the war in Ukraine has intensified, its knock-on effects have become more apparent, said The Guardian. One of them is the disruption to the supply of wheat: Russia and Ukraine are responsible for around a quarter of the world’s wheat. This could spell catastrophe for countries in the Middle East and North Africa, where most of the grain from “Europe’s breadbasket” goes: Lebanon, for instance, imports half its wheat from Ukraine, and rationing is now being put in place there. 

The UK grows 88% of its wheat; but disruption to trade (Ukraine has banned the export of wheat, maize, oats and other foods), added to spiralling energy costs, are having a serious impact on food prices here too. Shoppers can expect to pay more for everything from beef (fed on imported grain-based feeds) to tinned tomatoes (which will face higher transport costs). Then there is the rising cost of nitrogen fertiliser: not only is much of it imported from Russia, its price is being sent sky high owing to the escalating cost of gas. This could mean lower yields for UK farmers and higher prices for their crops. Food inflation is only set to get worse.

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