5 reasons why cost-of-living is moving up in Britain

Highlights

• The inflation rate in the UK rose to its highest level at 5.4% in December 2021.
• The UK economy has been facing inflationary pressure for the last one year leading to a higher cost of living.
• At present, prices of goods and services are rising so quickly that they are above the median wages received by individuals.

The inflation rate in the UK rose to its highest level at 5.4% in December 2021. The UK economy has been facing stern inflationary pressure for the last one year leading to a higher cost of living. The last month inflation reading was the highest in almost the last 30 years because of various reasons that have collectively impacted the household finances.

The price rise has been seen across the globe for many years. As per market experts, a gradual increase in prices is good for the economy, indicating economic growth in the country. However, current prices of goods and services are rising so quickly that they are above the median wages received by individuals. Hence, pushing low-income households to make hard choices and buy fewer essential goods and services.

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The UK inflation rate rose from 0.7% in January 2021 to 5.4% in December 2021. This rapid price rise is because of multiple factors collectively impacting our lives. Let us look at some of the key reasons that led to the rapid rise in the cost of living in Britain:

A surge in household energy bills

At the start of the pandemic, the global energy prices declined significantly, leading to negative crude oil futures contract prices. However, the demand recovery across the industry segment led to a surge in crude oil prices to currently trade above the USD 80 level.

The oil & gas price increased due to demand boost and supply control by OPEC nations that ensured higher energy bills for UK households. The petrol price in the UK is almost at a decade high leading to elevated transport cost for businesses which are eventually passed on to the consumers.

In addition, the household heating bills has skyrocketed by nearly 50% after the revised price cap in October 2021 and is anticipated to put further pressure on household finance when the energy price cap gets changed in April 2022.

Higher freight cost

Online shopping witnessed a huge surge during the pandemic period. At the same time, many retailers have seen a drastic rise in the shipping cost of goods due to supply chain constraints across the globe. The cost of shipping a single container from Asia to the European market increased by more than 10 times in the last one year. As a result, higher goods prices are being passed on to the consumers. In the UK, the shortage of lorry drivers amid Brexit and the Covid-19 protocol has further increased costs.

Higher labour wages

The UK retail sector has been witnessing a shortage of workforce due to the reduced workforce population in the country after the pandemic. Also, the self-isolation of workers in case of close contact with the Covid patients has led to business operations disruptions.

As a result, the average wages in the UK have shot up significantly, and businesses are using various strategies to attract and retain the workforce, including joining bonuses. These additional costs are being passed on to consumers.

Brexit & Trade barriers

The new rules that came into force after the Brexit have also led to an increase in the cost of living, especially for UK residents. As per the market estimate, the cost of imports from the European Union to the UK has increased, leading to lower imports in the first half of 2021. Telecom network providers in the UK also plan to reintroduce roaming charges for UK residents travelling to the European Union in 2022.

Climate changes & Extreme weather

One of the reasons for the rapid rise in crude oil prices has been the supply uncertainty due to extreme weather in the US and other countries. Many hurricanes hit the US coastlines in the last one year leading to infrastructure damage at project sites and disruption in crude oil supplies.

Extreme weather in some countries like Brazil impacted coffee production due to severe drought.