Soaring energy bills will turn cost of living crunch into a crisis
WE are heading into a cost-of-living crunch this autumn, with low and middle-income Britain facing the tightest squeeze as bills rise and Universal Credit is cut.
Crises often build slowly then hit fast — and that is exactly what has been happening here, as the difficulties of reopening an economy after a pandemic shutdown hit home.
That reopening has gone better than many of us dared hope.
Young people have come off furlough and back into work.
Last year saw the biggest economic downturn for three centuries.
The recovery since then has been stronger than official economic forecasts suggested.
But it hasn’t been completely smooth running.
It turns out economies are complex beasts that can’t simply be turned on and off like a light switch.
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Economists like to talk about supply (what we produce) and demand (what we want to buy).
We are living through what happens if the two don’t match up.
Firms can’t hire staff fast enough to cope with us suddenly returning to pubs and restaurants to see the friends we’ve missed over the past 18 months.
Inflation is on the up as economies around the world reopen simultaneously, pushing up demand for raw materials such as oil and gas.
Last week saw the largest single-month increase in inflation for 30 years, from two to 3.2 per cent, with the cost of transport rising due to a surge in fuel prices after mid-pandemic falls, when no one was driving.
And there are more price rises to come.
Firms have seen the cost of raw materials and other inputs rise by ten per cent — which they will pass on to consumers in the months ahead.
Inflation could easily hit four per cent this winter.
This scale of price rises should be temporary but it will feel like a tough autumn nonetheless.
The global rise in oil and gas prices is behind much of this.
But while that problem has been slow to build, the effect on our household budgets will hit hard next month as energy bills increase.
The Government’s cap on energy prices is going up on October 1, by £139 a year on the typical electricity and gas bill.
And we are likely to see an even bigger rise in the spring because energy firms face rocketing wholesale bills.
Gas prices have more than doubled this year.
WIDESPREAD PROBLEMS
That surge is causing wider problems to the economy, in some unlikely places.
It has forced several fertiliser plants to close, causing disruption to a farming sector already suffering from a lack of labour.
The impact on our food supplies does not stop there.
A dearth of carbon dioxide — an offshoot from making fertiliser — is affecting how we produce, transport and store food.
These supply shocks will translate into reduced choice and higher prices in shops.
Cue headlines about Christmas being cancelled.
Lower-income households will see their spending power fall at exactly the same time as their energy bills rise, thanks to cuts to Universal Credit in October as the £20-a-week uplift comes to an end.
Some 4.4million households could see their incomes fall by more than five per cent.
Losing £1,000 a year is not small change.
These families are also likely to see the biggest rise in their energy bills because families on Universal Credit are four times as likely as the wider population to be on pre-payment meters, which are seeing the most punishing rises in gas and electricity prices.
If that wasn’t enough, October also sees the end of the Government’s furlough scheme.
Up to one million workers will have to return to their old jobs or find new ones.
With vacancies running high, most of these workers should find jobs quickly.
But some will become unemployed in the weeks ahead.
So a tricky autumn lies ahead for the country and countless families.
Much of this is beyond the Government’s control.
Politicians are known for producing hot air but they cannot be blamed for the lack of wind that has left turbines becalmed and not producing the electricity we need.
LIVING STANDARDS
This cost crunch is a timely reminder that all our living standards can be buffeted by global energy markets and the price spikes they throw up.
In the long run, that is another reason for ramping up our domestic renewable energy sources, better insulating our homes and becoming less reliant on gas for central heating.
But government also has an important and immediate job of protecting hard-working families from the full weight of this cost-of-living crunch.
First, the Government must ensure households whose energy suppliers go bust are supported.
Second, the Warm Home Discount Scheme, which gets eligible households £140 off their energy bills this autumn, should be made more widely available.
Third, and most important of all, the Government must avoid making an already tough situation much worse for millions of households.
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They should scrap the planned £20-a-week cut to Universal Credit due in just a few weeks’ time.
- Torsten Bell is chief executive of the Resolution Foundation, which works to improve standards for those on low to middle incomes.