Explainer
Energy
bills, mortgages, food: will cost of living surge again under Labour?
The
government claims to be fixing the economy but households may face more
pressure in the months ahead
Heather Stewart, Phillip Inman and Rupert Jones
Sat 23 Nov 2024 07.00 GMT
Labour swept to power in the wake of a cost of living crisis
that hit households hard, with the price of food and energy rocketing alongside
the impact of Liz Truss’s disastrous mini-budget on mortgage rates.
At 2.3%, inflation is nowhere the 10% peak after Russia’s
invasion of Ukraine, but it is creeping up, and could hit 3% in 2025, say
forecasters.
Here are some of the pressures households are likely to face
in the coming months at a time when the government claims to be “fixing the
foundations” of the economy.
Energy
prices
Ofgem announced its latest price cap on Friday morning, with
average energy bills to increase by 1.2% from January, to £1,738 a year.
The forecasters Cornwall Insight say the cap is likely to
come back down again in April, by a modest 1.4% – but that will make little
difference for households struggling to make ends meet over the winter.
Mindful of the backlash over the cutting of the winter fuel
payment for most pensioners, ministers have persuaded the energy sector to set
aside £500m for this winter to cushion the blow for some of the hardest hit
households – including by writing off debts for some.
But Citizens Advice, which advises cash-strapped consumers,
said the total energy debt owed by households to their suppliers is now £3.7bn
– and called for direct support from the government.
“Without government action, millions are at risk of being
left in the cold this winter and beyond,” said its head of energy policy, Alex
Belsham-Harris.
Even comfortably-off consumers may note that while utility
bills are no longer rocketing, they remain a good 40% higher than the £1,200 a
year or so they were before the Ukraine war.
And with geopolitical uncertainty high, as Donald Trump
prepares to arrive in the White House, energy prices are not expected to return
to those levels any time soon.
Housing
costs
The cost of fixed-rate mortgage deals has been creeping up
in recent weeks, and the bigger than expected rise in inflation in October has
fuelled expectations that lenders will continue to increase rates.
That is unwelcome news for would-be homebuyers who want the
security offered by a fixed rate, as well as anyone whose existing mortgage
deal is coming to an end.
The financial data provider Moneyfacts reported that the
average new five-year deal was 5.26% on Thursday – compared with 5.09% on the
morning of the budget on 30 October.
That means someone who took out a £200,000 five-year fixed
mortgage on Thursday is paying £20 a month – or £240 a year – more than if they
had signed up for an equivalent deal a few hours before Rachel Reeves set out
her budget.
Rents have been increasing sharply too. The latest Office
for National Statistics (ONS) data showed an 8.7% jump in average rents across
the UK over the past year – a rise of more than £100 a month.
The £25bn
increase in employer NICs
There is growing concern that the increase in employer
national insurance contributions (NICs) next April will raise prices in the
shops, hold back wages and hiring and potentially dent economic growth.
Labour plans to raise £25bn from a 1.2% increase in employer
NICs and a cut in the salary threshold when employers first start contributing,
from £9,100 to £5,000.
If businesses are able to pass on the costs, it could lead
to job cuts and higher prices. Retailers have warned of a £7bn increase in
annual costs.
The Office for Budget Responsibility (OBR), the Treasury’s
independent forecaster, estimates that workers will bear about 60% of the NICs
increase initially, rising to 76% in the medium term.
Those businesses able to offload some of the cost to
consumers in higher prices will push up inflation, potentially persuading the
Bank of England to keep interest rates higher for longer.
The BoE’s latest forecasts, released three weeks ago,
suggested the budget would raise inflation by half a percentage point at its
peak, based on the impact being split across prices, profit margins, workforce
levels and wages.
Donald
Trump’s trade policies
Evidence is emerging that Donald Trump will have a cabinet
full of loyalists who will cheer him on as he imposes tariffs on US imports.
Within hours of taking office in January next year, the next president can use
executive powers to raise tariffs and rely on Republican majorities in the
Senate and House of Representatives to back him up.
Higher tariffs increase the cost of imported goods. China is
the focus.
Experts expect the tariffs to be phased in over four to six
months. The delay will allow Trump to make demands on trading partners in
exchange for more lenient treatment.
The UK and mainland Europe are expected to avoid the 60%
tariffs imposed on China, but could still find their exports to the US hit by
10% or even 20% tariffs.
Some of the impact of the tariffs on US consumers could be
mitigated if the dollar appreciates against other currencies as a result of the
policy, as many economists expect; but a weaker pound would be tough for UK
consumers, driving up the cost of imported goods and raising inflation.
Research by Dr Aurélien Saussay for the Grantham Institute,
which researches the climate crisis and environment, showed extra tariffs would
rebound first on the US, cutting gross domestic product (GDP) by -0.64%, before
hitting the Chinese economy with a 0.68% reduction, and the EU with a more
modest -0.11% fall.
Food
Surging food prices were one of the key factors driving
inflation through 2022 and 2023, as well as one of the most visible signals to
consumers of the cost of living crisis.
At one point, the annual inflation rate for food products
was an extraordinary 19%, hitting shoppers hard every time they filled up a
basket.
The latest ONS data showed food price inflation is now a
much more manageable 1.9% a year; but it has not dipped below zero, which would
herald falling prices, so spending a lot more on the weekly shop has become a
new normal.
Food prices are expected to become more volatile because of
the climate crisis, with more extreme weather and substantial shifts in
seasonal patterns. These can lead to spikes in the price of individual
products, with olive oil and cocoa being recent examples, or across-the-board
increases, when weather patterns are out of kilter with historic norms.
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