The cost of almost everything has increased rapidly in the past year as inflation reaches a 40-year high and wages barely stretch to meet people’s essential costs in an ongoing event that is being referred to as the cost of living crisis.
However, there has been growing confusion over what the cost of living crisis is and why it has happened with millions of people left with no choice but to pay over the odds for their energy, food and fuel in 2022.
We’ve compiled an all-you-need-to-know guide to help you find out everything you need to know about the cost of living crisis, including what it is, what caused it and where you can turn for extra financial support ahead of further price hikes.
What is meant by the cost of living crisis?
The cost of living crisis refers to the current economic period where the cost of essential items, like energy, fuel and food has risen much faster than the average income.
This has been powered by rising inflation which is, essentially, a figure that highlights how much prices have risen in the past 12 months and, earlier this year, hit 10.1% – the highest since 1982.
This has, understandably, had a disastrous impact on millions of people’s personal finances and with the pound worth less than it was just a few months ago, consumers are cutting back on non-essential spending and taking drastic measures to protect the pound in their pocket.
It has been predominantly caused by high inflation outstripping wage growth but several other factors have contributed to continual price hikes across the board.
Why is there a cost of living crisis?
The cost of living has been gradually increasing since around mid-2021 with several factors responsible for the catastrophic price rises households and businesses up and down the country have faced.
For example, the economy is still recovering from the impact of the COVID-19 pandemic when the hospitality, transport and entertainment industries were shuttered and the government provided a multi-million furlough fund to help people make ends meet. This left the economy in a fragile state that it is still trying to recover from.
The high price of gas, electricity and fuel has also played a key role in the ongoing cost of living crisis with energy suppliers either passing increased prices onto customers or collapsing under soaring gas prices and going bust.
What has been affected by the cost of living crisis?
Since early 2022, prices have risen across the board and most people have made changes to their spending habits to ensure they can still afford to meet their essential costs.
In April this year, for example, annual energy prices increased by 54% compared to just 12% in October 2021. This was when alarm bells were raised over the rising cost of living and was what forced the government to intervene and introduce a series of measures to help people cope.
The price of food has also skyrocketed since the start of the year and, in response, budget supermarkets have surged in popularity amongst low-income families and households looking to make their money stretch further.
There have been fears the inflation rate could surge to 18% by early 2023 which would mean goods and services become 18% more expensive than they were when the cost of living crisis first took hold earlier this year.
Who is being affected the most by the cost of living crisis?
The impact of the cost of living crisis is being felt by almost everyone but low-income households and small businesses are being hit particularly hard.
According to a study by the Institute for Fiscal Studies, the annual inflation rate for the poorest households is 10% compared to 7.9% for the richest households.
This is because the country’s lowest earners spend a larger proportion of their income on essential costs and will notice even the smallest changes to their expenditure with less disposable income to spend on luxuries, treats and recreational activities, such as eating out.
Furthermore, a richer household might be better equipped to deal with the rising cost of living and can absorb higher inflation by reducing their savings – a luxury most poorer households can’t afford.
What can you do about the cost of living crisis?
The cost of living crisis has impacted everyone differently and whilst there is little you can do about rising inflation on a personal level, there are steps you can take to offset the financial burden of further price hikes.
For example, cutting back on non-essential spending and switching to a budget supermarket can slash your food bill and free up more money to be spent on rising energy bills or building an emergency fund. There are also hundreds of loyalty and rewards cards available that are free to sign up for and can open you up to a world of extra savings.
It might also be worth shopping around for a better deal on your subscription services and broadband and phone bills with most companies happy to switch you to a cheaper plan if you’re considering leaving your current tariff.
Still have questions? Our cost of living crisis guide tells you everything you need to know about the cost of living crisis and where you can access further help and support.
