What Investors Can Learn from the UK’s Cost of Living Crisis

Over the past two years, the COVID-19 pandemic, geopolitical tensions in Ukraine, and resulting supply chain disruptions have caused severe financial repercussions for governments and individuals worldwide.

Feb 27, 2023|Market Insights- 5 min

Among developed nations, the UK has experienced severe economic pressure due to high inflation, low wage growth, and soaring import costs. This has resulted in a prolonged cost-of-living crisis with widespread effects on the population.

This article examines the underlying factors driving the UK's cost of living crisis, its effect on consumers, and the lessons for investors from this story.

What is the cost of living crisis?

High inflation coupled with slow growth in disposable income makes the necessities of daily life—food, clothing, accommodation and fuel/ energy—more expensive for the regular consumer.

As of January 2023, the UK's annual inflation was 10.1%, above the Eurozone average (8.5%) and significantly above the US (6.1%).[1] Meanwhile, the UK’s latest annual wage growth figures (excluding bonuses) show an increase of only 6.7%.[2]

Inflationary pressures have been building since early 2021, peaking in October last year (11.1%) to the highest level in 41 years.[3] While inflation has declined subsequently following rate increases by the Bank of England (BoE), it remains at five times the target rate.

The BoE has indicated that inflation will remain elevated for another two years,[4] and that growth in pay levels will continue to lag for the next 12 months.[5] Put simply, it seems that the crisis will persist for the foreseeable future.

What are the factors that led to it?

While the UK has been subject to the same shocks and shortages as most Western countries, certain factors have left it more exposed than its European neighbors. The overall economy is heavily reliant on imported goods, leaving it particularly vulnerable to disruption in global trade or increases in global shipping costs.[6]

Increases in the price of gas following the reduction of Russian gas sales to Europe have hit the UK especially hard in 2022, as approximately 80% of households in England use gas for heating, and gas-powered stations generate one-third of the electricity.[7]

Also, the pound has weakened against the dollar and other major currencies over the past decade, magnifying the price rises in dollar-denominated commodities such as oil and gas. Over the past year, domestic gas prices and the cost of domestic electricity have surged 129% and 67%, respectively, translating into higher daily costs for the ordinary citizen.

How are people navigating around it?

The UK government has responded to the crisis with a variety of measures, including direct payments to eligible households and energy price caps. The support focused on the most vulnerable (the disabled and elderly), but could only go so far to meet the overall crisis.

Banks and other financial experts are sharing inventive strategies to economize, such as using second-hand uniforms at schools and smaller basket sizes at supermarkets, developing side jobs, and cultivating the art of the “staycation.”[8]

But many of the less well-off in society are being forced to make significant changes to their lifestyles, such as spending less on non-essentials (and, in some cases, essentials), using less energy, and being more diligent in comparing prices to find the best deal. Holidays, nights out, large purchases and trips abroad are off the agenda for many who could previously afford them.[9]

What can investors learn from this?

The saying goes, “The best time to fix the roof is when the sun is shining.”

The UK experience shows that when a crisis hits, making economies may not be enough to sustain even a frugal lifestyle, as some are forced to use personal savings or borrow for daily expenses.[10] Even if the crisis abates, this affects their long-term financial future negatively.

Inflation devours the power of savings and also weakens earning power. Saving to invest in a diversified, professionally-managed portfolio, can not only beat inflation but also provides for the rainy days that—as history has shown—will come, sooner or later.

[1] Eurostat

[2] Office of National Statistics

[3] UK Parliament

[4] Bank of England

[5] Office of National Statistics

[6] Institute for Government

[7] Office of National Statistics

[8] Barclaycard

[9] Office of National Statistics

[10] Resolution Foundation

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