While Boris Johnson remains at work as Britain’s prime minister, he faces a cost of living crisis, among other things. This year will be a painful year for millions of households as food prices and energy bills skyrocket. Inflation, already accelerating at its fastest pace in four decades, is expected to climb into double digits, and wage growth is not keeping pace.
The Bank of England forecast a sharp decline in disposable household income adjusted for inflation, saying it will be one of the worst years since the mid-1960s. There are already signs that people are tightening their belts. More than a third of people in Britain are cutting back on buying clothes, eating out or ordering takeaway food to save money, according to a YouGov survey in late May. In May, spending on credit and debit cards fell.
Pressure is mounting for companies, who are concerned about their own rising expenditure on energy and raw materials such as metals and cooking oil. According to a recent Barclays survey, half of small and medium-sized businesses in the UK are concerned that rising costs will negatively affect consumer spending.
The government will try to isolate people from some of these rising costs later in the year by giving each household £400 ($500) off their energy bills and gifting millions of low-income people worth more than £1,000.
But activists still warn of hardship, pointing out that use of the food bank had already increased during the pandemic. People on limited incomes, who spend a larger portion of their money on essentials such as heat, electricity, rent and food, face particularly hard inflation. Prices for staple foods are rising rapidly. Pasta prices rose by 50 percent in April compared to a year earlier and bread prices rose by 16 percent.
UK households will also face rising interest rates, impacting their mortgages, savings and other loans. As inflation rises and expands into more goods and services, the Bank of England is trying to address the problem by raising interest rates quickly. At the latest central bank meeting, policymakers raised the benchmark rate to 1 percent, the highest since 2009, and more hikes are on the way.
But the bank has warned it is on a “tight path” as it tries to tackle inflation without cooling the economy too much and increasing the risk of a recession. Pressure on household budgets is expected to slow down consumer spending and slow economic growth. The bank predicts that the economy will contract by nearly 1 percent in the fourth quarter of this year, when the next round of higher energy bills takes effect, and then shrink over the course of 2023.