Tackling the Cost of Living Crisis

What effect will the cost of living crisis have? 

Low income households spend 70-80% of their incomes on essentials, therefore these houses will be hit hard when the prices of food and energy start to rise. A second factor for these low income households is the fact that it is essentials whose prices are rising, they cannot choose not to buy these essentials. 

Inflation is projected to top 14% and very few people will get a pay rise to match that. This will mean that at the same time the prices of essentials are rising, people are also taking home less real pay. 

It is predicted that 20% of UK households will have energy and food bills higher than their income. 

What will happen to savings levels? 

Savings is the main way that the cost of living crisis is being fought whilst incomes aren’t keeping up with inflation. 

There were reports that there was a huge increase in savings following the pandemic where people couldn’t spend as much as normal. However, this is only partly true. Higher income households saw a massive increase in savings, however those at the lower income level saw savings decimated. Therefore with the low stock of savings, rising prices of essentials and incomes failing to keep up with inflation, the number of households with no savings is set to double between 2023 and 2024, resulting in nearly a quarter of all households with no savings at all. 

What can policy makers do about it? 

Policy makers have to accept that traditional policies might not save us from the crisis. Policies that were once on the fringe of academic and political thought could become mainstream. Ideas that could be considered are raising the taxes of the rich or even nationalising the energy producers.

Given a large factor of the cost of living crisis is the rising energy bills, another policy that could be implemented is the idea of a variable energy price cap. The idea being that the more you earn, the higher your price cap would be. This makes sense given energy usage is nearly perfectly correlated to income.