How can the next government end the cost of living crisis?

Good evening from New Economy Brief.

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News broke this morning that inflation is now 2.3%. While the government wanted this to be a sign that its “plan is working”, the reaction was less positive. As households continue to face a painful squeeze on living standards, this supposed indicator of sound economic health seems to clash with reality. And we now know that there will be a General Election in July - a vote in which the cost of living crisis is likely to play a major role. 

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If inflation is where it should be, then why is there still a cost of living crisis? And why are corporate profits and the country’s wealthiest people booming while families are going bust? This week, we explore why falling inflation doesn’t represent an end to the cost of living crisis and the solutions available to improve living standards. 

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What actually is inflation?

Inflation figures are released monthly by the Office for National Statistics (ONS) and represent the change in price of a selected “basket of goods” over the previous year, meaning that the price of these goods rose by 2.3% in the 12 months up to April 2024. This is no doubt a smaller change in prices than the increases we’ve seen over recent years (though falling inflation, of course, does not mean falling prices). So what’s the big deal?

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Beyond CPI. ‘Headline inflation’ doesn’t necessarily give us the full picture. The sharp spikes in costs since 2021 mean that food, housing, energy and other essentials continue to eat into budgets far more than they used to. While there are signs that food price inflation might be slowing, for example, food and non-alcoholic drinks prices are still over 30% higher than in 2021. Meanwhile, some estimate that energy bills could be up to 60% higher this year than just before the energy crisis in 2021. 

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Wages. It’s true that wages are starting to rise, but even where they are increasing faster than inflation, there is a lot of catching up to do. According to the Trades Union Congress (TUC), pay packets are still worth less than in 2008 in nearly two thirds of UK local authority areas, making this the longest pay squeeze in over 200 years. Had wages kept growing at pre-financial crisis rates, the average UK worker would now be £200 a week better off. This is a wages crisis that began long before 2021.

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Beyond the statistics. Ultimately, however, people don’t need facts about wages and the price of essentials to know that they’re feeling poorer. This is a crisis that is acutely felt. The “good news” about headline inflation and ministers insisting that the economy is “turning a corner” is simply not enough to cut through the financial pain that families feel all over the country are feeling. A poll conducted by Focaldata on behalf of Stop the Squeeze found that an overwhelming majority of nearly 90% think there is still a cost of living crisis, despite falling inflation. 

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Will things improve? For various reasons, we don’t even know if this lower inflation rate will stick – many expect it could rise again soon. The Bank of England, for instance, is preparing for potential geopolitical crises that could cause oil prices to rise. What’s more, British consumers still haven’t felt some of the drivers of the most recent cost of living crisis. While many homeowners have been squeezed by increased mortgage costs (and as a result, renters whose landlords have passed on costs), many more have been enjoying lower, fixed rates until now. According to the ONS, almost 900,000 UK mortgages are up for renewal in the first three quarters of 2024, so thousands of households could see their outgoings spike over the next few months.

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We’re all in this together?

It’s difficult not to juxtapose the ongoing cost of living crisis with two other recent stories about the nation’s very wealthiest. Firstly, the Sunday Times Rich List, published last week, showed that the average wealth of the ten richest Brits is now £21 billion – up nearly 50% in five years. The top 350 are collectively worth £795 billion – more than Poland’s annual GDP. Secondly, a Unite the Union study of 17,000 companies in the UK last week found that profit margins have “spiralled out of control”, soaring 30% on average since the pandemic. 

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Rebalancing the economy.  From wars to extreme weather, the cost of living crisis has been driven by a number of factors. But as households continue to struggle while headline inflation returns to target, this is clearly an issue that is much stickier than a simple unravelling of a two-year crisis. Many campaigners point to excess profits like those highlighted in Unite’s report as a sign of a profoundly unbalanced economy. Global Justice Now, for example, points to “monopoly power” as the heart of the food crisis . Meanwhile, organisations like Tax Justice UK argue that the extreme wealth exhibited in the Sunday Times Rich List could provide the funds to solve the root causes of the crisis, estimating that a 1-2% tax on assets over £10 million would affect only 20,000 people and could raise up to £22 billion a year. Similarly, the Stop the Squeeze campaign has said that “redressing imbalances in the tax system by taxing wealth fairly… would raise substantial government revenue that could be used to fund cost of living support measures.” 

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‍A hollow victory? As we enter a general election period, the Conservative Party will wish to point to lower inflation as something of a victory, but the millions of households on squeezed budgets are unlikely to be celebrating. As we’ve seen, ending the cost of living crisis is more complicated than cutting headline inflation, and campaigners argue that this is a question of addressing the structural imbalances in the economy that haven’t gone away. The option of wealth taxes is one that will continue to be pushed - especially when taxing even a tiny fraction of the assets of the very wealthiest would provide billions of pounds of revenue that could go a long way to address the root causes of the cost of living crisis.