Editor's letter

Why we are in a cost of living crisis today

The cost of living crisis is a function of several factors. Merryn Somerset Webb explains what is behind it and how to prepare for it.

The cost of living crisis is real. It is partly about rising prices, and partly about rising taxes. You can feel the price bit all around you. Rents are at a 13-year high (rising over 8% at the end of last year). Oil prices are high and likely to stay high. Fertiliser prices rose 43% last week alone. Pulp and packaging prices are rising (much of our pulp came from Russia), as are sunflower oil and wheat prices (major exports from Ukraine).

Some might say we could do better all round if we gave up wheat and the agricultural tyranny it brings. But that isn’t much help right now: food-price inflation is at a decade-long high at 5.2%, and we may well see double digits by year-end. This is real scarcity inflation and it isn’t transient.

We’re mostly getting poorer every day. On to tax. National insurance is about to rise by 1.25 percentage points for staff and employers, while more people will be dragged into higher-rate income tax bands: the thresholds are not budging until 2026. Say you get paid an extra 4% this year and it just tips you into the 40% bracket. Then say inflation is 9%. You’ll have taken an inflation-adjusted pay cut and had to pay more tax on it. A nasty double hit.

Your other allowances won’t help. Quilter has looked at the UK’s eight main ones. Six have either been frozen (so they are lower in inflation-adjusted terms), or have actually fallen over the last decade. The pensions lifetime allowance (LTA) is currently 28% lower than it was a decade ago, falling from £1,500,000 to £1,073,100. Had it been raised in line with inflation it would now be £1,885,000. That £1,073,100 might sounds like a rich person’s number. But as Aegon points out, that would buy an annuity that – after tax – will produce an income of £2,180 a month. Not really a rich man’s number. The upshot of all this is simple: most of us are getting poorer every day.

No easy answers Can we cope? Sort of. We still have (for now) the wealth built in the asset-price boom of the last decade and we have savings: UK savers entered 2022 with £1.9trn on deposit (on a pathetic interest rate of 0.14%), enough to cover spending needs for 18 months. Unfortunately this cash is concentrated in the accounts of the over-55s, so borrowing is on the rise too.

The latest Bank of England data shows credit-card borrowing came in at £1.5bn in February versus just £100m in January. That is the highest monthly amount since records began (in 1993). This is possibly less because consumers are going on spending sprees than trying to maintain lifestyles amid fast-rising prices: 83% of adults reported higher living costs in March 2022 to the Office for National Statistics.

I’d like to tell you there is something simple you can do to make this OK. There is not. If your income isn’t CPI (consumer price index), or, better, RPI (retail price index)-linked (mostly it isn’t), this isn’t easy. At all. There are a few tax tweaks available. Use your allowances (what is left of them) and look at whether salary sacrifice can mitigate the NI rise a little. Otherwise listen to our podcast with Troy’s Charlotte Yonge for tips on preserving the real value of your capital (she likes gold very much) and, if you are happy with a proper amount of risk, there may be opportunities in shipping.

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