How the cost of living crisis will affect supply chains and energy prices in the UK

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Middle-income households will be worse off next year due to the rising cost of living and tax increases, an independent think tank has said.

The Institute for Fiscal Studies said the Budget spelled a “worrying outlook for living standards”, warning that rising inflation rates and higher taxes would cancel out any increase in wages.

It comes after the Government’s economic forecaster warned that the cost of living could rise at its fastest rate for 30 years.

The Office for Budget Responsibility (OBR) said that inflation could reach almost 5 per cent.

i breaks down what this means and how it could affect you.

What is inflation?

Inflation measures how the prices of goods and services that households buy changes over time. It is measured in a range of ways, the main one being the Consumer Prices Index. This records how much it would cost to buy 700 commonly-bought items including food products and household goods.

High inflation means that the cost of living goes up, as the prices of goods such as food and energy increase.

How the cost of living crisis will affect supply chains and energy prices in the UK
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Will I pay more in the supermarkets?

Food prices are rising more quickly than expected, according to the British Retail Consortium.

Britons were forced to pay nearly £6 more on their shopping over the past month than during the same period in 2020 because of rising inflation, analysis suggested.

According to market insights firm Kantar, grocery prices rose by 1.7 per cent during the past four weeks compared to 2020, leaving the average shopper paying an extra £5.94.

The typical household spends £4,726 per year in the supermarkets, so any future price rises will quickly add up,” Kantar said.

Why are prices rising?

This is largely due to worker and HGV driver shortages, rising energy costs and additional costs from Brexit, all of which make goods more expensive to produce and distribute to supermarkets. This in turn can cause price hikes.

In August, wholesalers warned that the cost of basics such as cooking oil and vegetables had soared.

And the amount of food we get for our money may also reduce. The boss of Nestlé – which owns brands including KitKat and Nescafé, recently admitted that the firm may have to cut the sizes of some of its products to help the business cope with increasing costs.

Alongside this, there have been shortages of some products in supermarkets and food outlets due to supply chain problems.

What if I buy food out?

Food outlets have also been hit by the rising prices. Shan Selvendran, the boss of the Morley’s fried chicken chain, told i that chicken prices had risen by 13 per cent and lamb ribs had doubled in price, forcing him to consider price rises.

“We will have to raise prices eventually. Meals could go up by at least 20p. I feel sorry for the customers because wages aren’t rising, but I have no choice,” he said.

Other goods

Will non-food purchases go up in price?

It’s not just food which is seeing price hikes and shortages, with rising shipping costs and HGV driver shortages taking their toll. The UK has an estimated shortfall of 100,000 HGV drivers, which has made it difficult to get products to shelves.

Brexit has also worsened supply chain problems, with delays at ports leading to delays in deliveries.

The shortages of HGV drivers have seen international shipping costs increase up to tenfold, meaning that the price of many goods imported from overseas has risen.

Furniture, garden and DIY equipment and electrical goods are some of the products which have seen recent price rises.


Will my fuel bills go up?

Wholesale gas prices have more than quadrupled this year, rising by more than 70 per cent since August alone. This means fuel bills are on the rise.

The soaring prices have also forced some smaller energy firms into collapse, including Avro, Green, Igloo, Utility Point, People’s Energy, PfP Energy and MoneyPlus Energy, meaning that some customers may have to change energy providers.

Why are prices rising?

This is largely a supply and demand issue; as the economy rebounds from the pandemic, the demand for energy is going up, but supply is currently low.

In part, poor supply comes from a cold winter in Europe which left stocks in Europe unusually low, while Russian pipeline gas supplies have also been lower than expected. Asia also suffered a cold winter, so has been competing to import liquefied natural gas.

The energy price cap has been increased, which the OBR said has contributed to raising the cost of living. The cap puts a limit on the price that suppliers in England, Wales and Scotland can charge customers for energy on a standard tariff.

Money management

Will my pay go up?

While workplaces are not obliged to increase pay in line with inflation, it is often used as an argument when employees are negotiating pay. This could see some workers receive a pay rise in line with inflation, which would help to line up earnings with the cost of living.

How will savings be affected?

At the moment, interest rates are very low, with the highest rate offered by banks standing at around 1.5 per cent. If inflation hikes but interest rates don’t go up, your money will lose buying power in real terms.

What about loan and mortgages?

Many loans – such as tuition fees for students – are linked to inflation, so rising inflation rates could increase how much you pay back.

However, many people have fixed-rate mortgages which means they should not be affected by inflation.

Will my pension increase?

The state pension is linked to inflation. The Government last month suspended the pensions “triple lock”, a policy which guarantees the state pension rises in line with whichever is the highest of inflation, earnings or 2.5 per cent.

Because of the way wages have artificially inflated because of the pandemic, the Government has scrapped the measure for April 2022 to avoid a costly pensions bill.

However, the Government is insisting state pension payments will be aligned with inflation; a temporary double lock will mean the state pension goes up by the rate of inflation rather than earnings, which could have been around eight per cent and cost nearly £5bn more.

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