The cost of living crisis just got worse – happy Bleak Friday

Old lady protesting against the cost of living crisis

There is no easy solution to the cost of living crisis

(Image credit: © Vuk Valcic/SOPA Images/LightRocket via Getty Images)

published 1 April 2022

Happy Bleak Friday!

That’s the nickname being given to this particular April Fool’s Day because – quite apart from the weather – it’s grim out there.

The average household energy bill is going up by 54% today. So obviously, it’s the ideal time for it to start snowing.

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And then there’s all the other things driving up the cost of living, from petrol prices to food prices.

So what can you do and how much worse will it get?

Your cost of living has probably just gone up by rather a lot

Today the energy price cap has been pushed up by 54%. The price cap is set by the regulator Ofgem. It was a stupid idea when it was introduced (it’s only been around since 2019) – it’s yet another bit of the political short-termism which has helped to paddle us up the unappealing creak in which we’re now circling haplessly.

Moaning aside, what does this actually mean? The price cap is often expressed in a rather confusing manner. The average household on a standard variable energy tariff will go from paying £1,277 a year to paying £1,971 a year.

Just to be clear though – because that term “cap” is very confusing in this context – that’s the average household, using the average amount of energy. What the price cap actually is, is a cap on the cost per unit.

So yesterday, the price cap was 4p per kilowatt hour for gas, and 21p/kWh for electricity. Today, it’s gone up to 7p/kWh for gas and 28p/kWh for electricity.

However you express that, it’s a big rise. But it does mean that there’s a lot of variance around that average.

Anyway, it means that if you’re on a variable energy tariff rather than a fixed one, your energy bill just went up by a lot.

So that’s one component of “Bleak Friday”.

Your other bills will be going up too. I got a note from my mobile provider earlier this year pointing out that from 31 March, my bill would be going up by December’s CPI (consumer price index) inflation reading plus 3.9%.

With CPI at 5.4% in December, that’s a 9.3% increase. It’s on a relatively small bill but that’s chunky. I’m just grateful that it wasn’t linked to RPI of 7.7%, or my bill would have seen a double-digit increase.

Meanwhile, Hargreaves Lansdown points out that council tax bills are going up by an average of 3.5% (to an average of £1,966 for Band D homes).

Now, in the context of a 54% energy bill jump, and current inflation at 6%-8% (depending on your preferred measure), that almost sounds like a bargain – but every little hurts. And – just asking – have your wages gone up by 3.5% this year?

This is before we even start on fuel prices, or Rishi Sunak’s hike in National Insurance contributions, and his freeze on every tax allowance and threshold going, all of which will be munching into any pay rise you have managed to secure this year.

There is no easy solution to the cost of living crisis

So what can you do about all this? On the energy bill front, there are no easy solutions. As the team at Martin Lewis’ MoneySavingExpert points out, “there’s nothing meaningfully cheaper than the new price cap – so for most, switching won’t save you money”.

My usual reaction when someone says “put on another jumper” is a surge of irritation. But the reality is that if you want to spend less on energy, there’s no other option but to use less energy.

That involves either turning down thermostats and putting on thermal pants or investing some of your savings in better insulation, alternative heating systems, or those little carpet snakes that sit in front of your doors, keeping out draughts while tripping the unwary.

There is a bit of relief available for the less well-off, including a bit of money off council tax for those in bands A to D. And a rise in the National Insurance threshold from July should be a net gain for anyone earning roughly £30,000 or less.

But while that’ll take the edge off the price rises, it by no means offsets them. Sky’s Ed Conway – doing a rough and ready calculation – reckons that it all amounts to “roughly half the increase in the cost of the average energy bill.”

And if you are among the ranks of the better off, then life is going to get significantly more expensive.

As Chris Giles points out in the FT, Sunak’s decision to freeze allowances – given current inflation rates – is now expected (by the Office for Budget Responsibility) to see him rake in £18.8bn a year by 2026-2027, versus £8.2bn a year when it was first announced in 2021.

That’s not a stealth tax, that’s an inflation tax. And it explains why Sunak’s penny-off-income-tax promise is essentially hollow politicking (though I still want to give him a tarnished gold star for harmonising the NICs and personal allowance thresholds, any nod to tax simplification should be gratefully welcomed these days).

And this is all happening at a time when inflation is also giving your investments an absolute mauling.

Merryn has some thoughts on funds that might help to protect you from inflation in her editor’s letter last week. And my colleague Cris made some changes to the exchange-traded funds that comprise our model passive portfolio – that’s worth reading about here.

Other than that, make sure you use your tax-efficient allowances, and keep your cost of investing down, because every percentage point you can save today is going to make a difference.

Oh, and maybe invest in some of the only industries to benefit from all this. In the latest issue of MoneyWeek magazine, out today, we look at how to invest in the industries which will be providing us with the energy we’ll be needing for the foreseeable future. If you’re not already a subscriber, sign up now and get your first six issues free, plus a free report on how to invest for more inflationary times.

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John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.