Is the cost of living crisis affecting you?

I’m sure you’ve all seen the headlines: UK inflation hits 40 years high, Interest rates rise rapidly but what does this really mean for you?

What is inflation?

Inflation is a measurement used to assess the cost of living within the UK, it looks at prices in a ‘basket’ such as food, fuel, energy, goods and services and can even include things such as second-hand cars. When the items in the ‘basket’ increase in price it means you get fewer items for your money compared to a year ago. Your £100 won’t buy what £100 used to.

The constant rise in inflation over the past few months can be attributed to energy, fuel and a lack of raw materials around the world. Mainly due to the Russian invasion of Ukraine that took the world by shock earlier this year, just as we returned to normal from the coronavirus. Electricity is now nearly double what it was a year ago and fuel has just crept up to £2 a litre. The effects of the ongoing crisis are being felt around the country.

Inflation is sharply rising month on month, it has just reached 9%, a figure not seen since 1982. With no signs of slowing down, inflation could reach double figures a figure not seen since the 70s and we all remember what happened then right?

How is the government dealing with this?

The Bank of England has risen interest rates yet again to a rate of 1.25%, up 0.25% in the last month. The Bank of England’s decision to raise interest rates yet again has had mixed reviews. On one hand, it is trying to bring inflation back under control and eventually aiming to reduce the price of goods which are spiralling out of control. But on the other hand, people’s budgets will be stretched further due to the cost of debts (mortgages, loans etc) increasing.

Raising interest rates means it becomes more expensive to borrow money, fewer people want to take out mortgages and the overall economy slows down.

Although borrowing becomes more expensive it also means you earn more money on your savings, which will be encouraging for many people who have savings as interest in savings accounts over recent years has been shockingly low, with the best on offer around 2%.

The base rate of the BoE is currently 1.25%. The base rate is what lenders use to set their own interest rates. 1.25% is still historically low. 1979 saw a base rate of 17% which sounds crazy right? Over the recent years the base rate has been the lowest it’s ever been, with the majority of the decade spent with less than 1%. The last 4 Bank of England announcements have come with a raise in the base rate. Where they go from here is anyone’s guess.

Should you be worried about what’s happening right now?

We are living through unprecedented times, a pandemic that took everyone by surprise and the biggest war in decades. Nobody can predict what is going to happen next. Looking historically however there seems to be nothing to worry about, the 1920s great depression, the post-war rebuild and the financial crisis of 2008. each time the economy y has recovered and outperformed where it was before the crisis. We could be in for some financial turmoil but we will ride it out and hopefully be in a position to take advantage of the increased saving interest by budgeting correctly.