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What is causing the recent cost of living crisis?
We have seen that Inflation , which is a rise in the prices of goods and services, can be driven by one of two forces: Cost-Push Inflation or Demand-Pull Inflation. Now we will explore how recent economic shocks are causing a cost of living crisis in the UK.
In early 2023, the United Kingdom has been faced with soaring prices for basic food items such as fruit and vegetables which has caused food inflation to rise to a 45 year high. By March 2023, the annual CPI inflation rate for food and non alcoholic beverages rose to 19.2%, which means higher cost of living costs for households.
The causes of the recent cost of living crisis are complex but economists have predicted that recent supply shocks causing higher production costs, as well as a significant rise in demand following the ending of Covid-19 restrictions, have led to a combination of cost-push and demand-pull inflation.
Russia’s invasion of Ukraine in February 2022 caused a significant global shortage of oil and gas and other commodities. This shortage worsened already rising energy prices following the reopening of the economy after Covid-19, making it more expensive for firms to produce goods and services. Additionally, Brexit has resulted in the UK becoming more dependent on energy imports. A combination of these factors has resulted in the UK’s inflation rate remaining very high in comparison to other nations such as the USA.
This chart uses an Index. This means that we can see how each price changes over time relative to December 2020. This technique is often used in data visualisation for No access.
These supply chain disruptions have contributed to the cost of living crisis in the UK, which has had a significant impact on households and businesses across the country. However, as can be seen below, the Consumer Price Index (CPI) of gas and motor fuels have started to fall below their previous peaks.
*tight labour market / Covid demand pull / Brexit cost push*