Is a new cost of living crisis about to hit Britain?

AJ Bell Money & Markets

The episode explores whether Britain is facing a new cost of living crisis driven by inflation, energy prices, and mortgage costs. The hosts

Key takeaways

• Inflation currently sits at 3.1%, with petrol prices driving recent upward movement.
• The energy price cap could see significant increases of up to 30% in January.

Main topics

• Cost of living crisis risks
• Inflation and energy price volatility

Notable quotes

The danger is not necessarily that inflation returns to sort of double digit levels... but actually that household incomes start falling behind essential spending again.

Conclusion

The episode serves as a warning to monitor inflation and tax changes w

Transcript preview

Speaker 5 (0:08) Hello, welcome to the Agile Money Markets podcast. I'm Dan Coatsworth and joining me today is Sarah Coles. Hi there, Sarah. Speaker 3 (0:15) Hi, Dan. So I think we should probably warn listeners up front that after, remember last week we discussed the end of the world? Well, we've actually got another catastrophic topic this week because we're going to be exploring whether we're facing another cost of living crisis. And that's because people and businesses are under pressure from higher inflation, higher oil prices, the threat of higher interest rates and tax threats, because, of course, budget speculation season's kicked off as well. Speaker 5 (0:39) Yeah, I should say that actually, you know, the start of this week has been a little bit more positive for markets. We're recording this on Wednesday, but as we speak, oil prices are easing slightly. So we'll have a chat about where we are with things like that and obviously the impact on. interest rates and obviously interest rate expectations and kind of what all this means for the cost of living. Speaker 3 (0:58) Yeah, so we're also going to drill down into a couple of sectors on this. So we'll look at the impact on sports related businesses and also on how supermarkets are kind of fighting for market share in this environment. We're also going to Speaker 5 (1:09) hear from Rob Abraham from Supermarket Income REIT, an investment company on the UK stock market. He's actually Tesco's biggest landlord. Speaker 3 (1:18) Now, we've seen the start of budget speculation season as well. So we're going to look at some of the rumours around property and various taxes and what they might mean for you. And we've also got the results of our survey into people's biggest budget worries. And we've got the latest tax statistics, which are actually quite revealing. Speaker 5 (1:33) Finally, we've been digging into some ISA stats and we've discovered a trend that could actually be risky for your family finances. Speaker 3 (1:40) So there's loads to get stuck into, but we're going to kick off first with the big question. So whether there is a new cost of living crisis brewing. So Dan, give us the outline here. Speaker 5 (1:51) Yeah, well, you know, Sarah, you're right to ask that question because there are signs pointing towards significant pressures on consumers. And I think to be able to answer that question, it's worth trying to understand what's actually needed to cause a new cost of living crisis. So the answer is fundamentally a combination of higher energy costs. sticky inflation, rising borrowing costs and weak wage growth. The danger is not necessarily that inflation returns to sort of double digit levels that we saw in 2022, but actually that household incomes start falling behind essential spending again. Now, recent data does point to some pressure from energy and fuel prices, and inflation does remain above the Bank of England's 2 % target. So there are also some worrying signs, but if you want one measure. to watch. It's real wage growth. That's pay growth minus inflation. Now, if wages are growing faster than inflation, most households can absorb higher bills. But if inflation starts to rise while wage growth slows, conditions for a new cost of living crisis fall into place. Now, like I say, there are some warning signs, but I'm not sure that there's enough evidence yet to say we are definitely categorically heading towards a repeat of the 2022-23. cost of living crisis. But I thought I'd ask AI to see what AI, I suppose we could call it the collective AI, what they said. And they said, well, my assessment, this is AI speaking, be that the risk has risen from low to moderate over the last couple of months, largely because of renewed energy market pressures and concerns that inflation could prove stickier than expected. So I guess with all that in mind, Sarah, should we sort of break down and go through some of these key things one by one? Speaker 3 (3:32) Yes. So, rather than just leaving it up to the robots to decide. So, there are several key data points that you really bear in mind when you're looking at this. So, the first one is inflation. So, that's the headline measure of price growth. That's CPI, which stands for Consumer Prices Index. So, if that starts accelerating again, it suggests that the everyday costs of things like all the goods and services we buy is rising faster. Now, if you get persistent inflation above 3%, that's going to make the bank a bit more cautious about it. cutting rates. Now, we did discuss inflation last week, so I won't go into too much detail, except to say that at the moment, inflation is 3.1%, which, as you say, is not terribly high. But there are a couple of things about it that are notable. So, the first is the direction of travel. So, the rise in the most recent results was driven by petrol prices. And we do know this is kind of the first spending category to react when oil prices are higher. So, over time, price rises are going to get more painful and more widespread. And the Bank of England said last week that although there was little round of what it calls second round effects, where it sort of feeds into things like higher wages, although there's not sort of sign of it just yet, the longer that these higher oil and gas prices endure, the bigger the risk they're going to start to materialise. So it actually emphasised that it's called itself standing ready to act, which is, I suppose, Bank of England chat for keeping an eye on things. And it's a pretty big hint that rate rises could be on the cards in the coming months. Speaker 5 (4:53) I mean, at the start, I mentioned about oil prices freezing back a bit. But as we're recording this, a trade at $99 a barrel, that's still quite high. Of course, that brings us on to the second key thing to watch, which is energy prices. So now we have an energy price cap in the UK to help control what's going on. So you kind of got clarity for three months periods about how much was the typical rate that people would perhaps see with their bills. Higher wholesale gas and oil prices. do quickly feed into bills. And we know from last time there was a cost-living crisis that energy costs were the major driver. So if you think about it, when we get these energy price caps, they're decided five to six weeks before the period comes into effect. So we actually know what they're going to be between 1st of October and 31st of December. It's a sort of kind of a small rise on what we've... currently have. Now, but come January, there's a possibility that we could see 20%, 25%, 30 % potentially increase in the price cap. Lots of suppliers are warning about these sort of steep hikes. So I think basically people should be aware that you could get the shock and potentially have a serious thought about what's your options. One is to potentially lock in fixed energy prices for a coming year. But obviously, If you do that, you have to bear in mind that, you know, what happens if entry prices suddenly come down, where you're locked in at this current price sort of thing. So it's like all things to do with finance, it's never that straightforward. Speaker 3 (6:29) Yeah. So in amongst all of this, so you've talked about the real wage growth being important. So that's kind of wage growth versus inflation. And it's a really key measure. to keep an eye on. So, for example, if wages are going up 4 % and inflation is 3%, then households are getting richer in real terms. But if inflation starts outpacing pay increases, then of course, your purchasing power falls. So, it's really important. Now, that was actually one of the toughest aspects of the cost of living crisis because wages actually after inflation fell between early 2022 and early 2023. So, there was that. long period of time, we were having to sort of stretch our money further and further. So wage growth at the moment is 3.5 % without bonuses and 3.9 % with. Now, once inflation is taken into account, actually, that's growth of just 0.8 % or 1.1%. And the other thing to bear in mind is that there is a really massive gulp between the public sector, where average wages grew 6.3%, and the private sector, where they're up just 2.9%. So that's actually growing slower than inflation at the moment. And then there's another question really about where we go from here. So we're expecting more inflation. So that kind of, you know, all the comments about inflation kind of feeding through. We're also seeing things like vacancies falling and unemployment rising and employment falling, all of which means there's likely to be very little pressure for higher wages. So I think that sort of flip where we start to see those wages grow slower is not terribly far off. Speaker 5 (7:54) Another thing I think people tend to look at in this situation is what's happening with the cost of going to do your weekly shop. So food inflation. This is a really interesting one. Food inflation is now only 1.3%. And that sort of level, people are thinking, well, definitely nothing to worry about here. This is partially down to supermarkets are... They're very fierce competition between each other. And one thing is that they're desperate to do is to be able to sort of bang the drum and say, look how cheap our prices are. So actually, if you read their financial results, they talk about investing price and what that means. They're sort of trying to do their very best to keep things low, whether that's them stomaching lower profit margins or being really heavy on supplies to make sure they're getting the best deals possible. But there's lots of potential for this. food price inflation to go up quite a bit. One is because we've had a very hot summer, and I think that's really affected crops. And so there's lots of farmers complaining about a lack of water to help grow their crops. We've also got El Nino. This is this recurring climate pattern where surface waters in the Central and Eastern Pacific Ocean become unusually warm. So there's a fear now that we're going to get a big disruption to essentially... agricultural industry. We could see different sort of weather patterns. And this does sort of feed through into potentially having a negative impact on the availability of food, perhaps as we know it. So the Food and Drink Federation forecasting food inflation to hit 3.9 % by December and actually sort of average out about 5.5 % next year. So definitely one area that could catch people by surprise. Speaker 3 (9:36) We're not really spreading a lot of joy with these key things to watch, are we, particularly? And I've got more misery because actually mortgage rates are a bit of a worry for people. Anybody who's got a sort of remortgage coming up is the fact that mortgage rates have been rising. So, what tends to happen is inflation tends to raise concerns about future rate rises and that causes bond prices to fall and guilt yields to rise. And rising guilt yields will often push up those fixed rate mortgages because they actually drive the spots market where those mortgages are priced. So, millions of households that are kind of coming off those fixed rate deals might see their disposable income squeezed quite hard because we've actually seen a lot of the lenders, including the major lenders, pushing those mortgage rates up. So, we've got this new data from Moneyfacts that shows that the average five-year fixed rate has risen to 5.91%. So, it hasn't actually been this high since October 2023. And that was just after that mini budget disaster. The average two-year fixed is actually not quite so high, so it's 5.87%. But if you think about someone who fixed five years ago, so go back five years, the average five-year fixed rate mortgage was 2.63%. So, if you're moving from that to these newer, higher rates, you could add hundreds of pounds to those monthly payments. Speaker 5 (10:46) And I think, obviously, that's probably on top of your driver, on top of what you've noticed recently, that you've got this big increase when you go to fill up your car at the forecourt. High oil prices affect petrol, diesel, transport costs. We also feed into logistics, inflation expectations. All this essentially means that when you have an oil price hovering around $100 a barrel, it's no wonder people are worried about inflationary pressures. Speaker 4 (11:12) Yeah, I guess what we need Speaker 5 (11:14) is, you know, to think about what could make oil rapidly decrease in value. And one would be a resolution to the Iran war. We're getting positive sort of feedback from, you know, talks at the moment. But, you know, until that actually happens, we actually see a resolution to the conflict. I don't think anything, anyone can take it as certain. But I think, you know, that's the key thing to watch at the moment, because obviously at the moment... The reason why oil is high at the moment is because people are worried about supplies of oil coming out of the Middle East and also disruption to refineries in the Middle East and in Russia as well. Speaker 3 (11:49) Yeah, so there's sort of the cost-price element of it. I mean, I think when we're looking at these general pictures, it's also the... the case that your own personal circumstances can make a massive difference and particularly your employment situation. So what can actually happen is rising joblessness actually can turn that cost squeeze into a really big economic problem. So households can kind of cope with higher prices if jobs are strong and wages are strong, but if you lose work... or if unemployment rises more generally, then you've got a bigger systemic problem. So, as I mentioned, there is already some weakness in the labour market. So, the unemployment rate is 4.9%, but there are some really big pockets of weakness. So, if you look at those young adults, it's sort of the 16 to 24-year-olds, so actually 13 % of them aren't in education, employment or training. And then also we've done some research at AJ Bell, which showed that 47 % of women and 40 % of men actually found it harder to get a job when they get to midlife compared to earlier in life. So it does mean that some households are actually going to be hit particularly hard, especially, I guess, if you're in midlife and you've got sort of, you know, somebody in your life who's a younger person. So that can be a real squeeze on both sides. Speaker 5 (13:00) So I think the bottom line here, there are definitely some warning lights flashing, particularly in the energy and bond markets. Speaker 5 (13:08) But I'd probably say the UK is experiencing more of a squeeze than a full-blown cost of living crisis. You know, you do need definitely to see higher energy prices, rising inflation, persistently high mortgage rates and wage growth falling behind prices before we can actually say that, you know, this is a crisis. And all those need to happen simultaneously. But, you know, we have some of those ingredients now. Speaker 5 (13:34) positively can say we haven't got all of them and of course you know that that's a good thing. Speaker 3 (13:38) Yeah it's nice to have some positive in all of this but it is important to kind of pay attention to what's going on particularly when you look at how the last cost of living crisis impacted particular industries so that included things like manufacturing, hospitality and leisure. Now the latter is really interesting because leisure spending is discretionary you kind of you don't have to spend this money. And four years ago, there was evidence of people cutting back spending on physical activity and sport. And that's obviously due to the fact that their money was getting squeezed. Now, it was only temporary because sport and fitness more broadly has kind of soared in popularity in recent years. And lots of people signing up for the gym, some of them