If you’re feeling that the economy is a bit out of control right now, you’re not alone. From gas and electricity to food to petrol – the price of consumer goods has risen sharply. Many households are finding it necessary to make difficult, but unavoidable, financial choices in order to make ends meet. This explosion in the price of day to day goods – and the financial hardship it’s caused - has led to a new phrase ‘the cost of living crisis’.
This article takes a closer look at the causes of the cost of living crisis. But please remember that many different factors influence the economy. This is just a quick look at what’s contributed to the cost of living crisis, or a starting point for further reading.
Economists say the current cost of living crisis has been caused by three key global events:
In response to the COVID-19 pandemic, many countries around the world introduced lockdowns. During lockdowns, manufacturing stopped. Once lockdowns were lifted and businesses resumed activity, it became clear that it’s easier to stop production than it is to start it up again.
Today, many businesses are still catching up to their pre-pandemic production levels. Until they achieve this, there is a decreased supply of goods. The lower supply combined with increasing global demand has caused the price of goods to rise for both businesses and consumers.
Ukraine is a leading exporter of many commodities, like grains and sunflower oil. When Russia invaded Ukraine, the military blocked the key transportation links. The reduced access to transportation made it difficult for Ukraine to export a significant amount of their commodities.
Disrupting the export of commodities from Ukraine caused further supply chain issues that were already being felt globally. This has led to shortages which has driven up costs.
Inflation at its current level has not been seen for decades. Government and central banks are taking steps to try to tackle inflation using policy. The goal is to bring it back to 2%, the desired level, without damaging the economy in the process.
The main way to change inflation is by changing interest rates. The Bank of England has been raising interest rates. When interest rates rise, it becomes more costly for businesses and consumers to borrow and spend. The idea is that making it more costly to borrow will discourage people from spending which will in turn cause the economy to slow.
The cost of living crisis is affecting all of us in some way, that may be the cost of food, our mental well-being or debts.
If you’re in financial difficulty or struggling in other ways with the cost of living crisis, you may find it useful to visit the Citizen Advice Service. They have information on debt solutions, ways to get help, mental well-being, support available from the Government and more. You can visit their cost of living page here