The UK’s cost -of-living crisis
demand-pull inflation. However, Milton Friedman, a monetary economist, said there would only be money illusion in the short run through the short-run and long-run Phillips Curves. Therefore, all households will be affected by the inflation situation, but some groups are worse off such as those workers on fixed incomes who are not part of a union, so thus have less bargaining power to demand higher wages to protect against the cost-of-living crisis. Inflation in the UK has been caused by various factors: the war in Ukraine, energy cap increases and Brexit which has caused imported goods to become more expensive. The war in Ukraine has led to the prices of oil and food stuffs to drastically increase, $111.10 a barrel for crude oil as compared with $73.16 a year earlier (BBC, 2022). All food items have increased between May 2021-2022 by 8.5% and more specifically pasta and couscous have increased by 16.1% (Race, 2022). Those on lower incomes are more affected by this as they will have to spend a larger proportion of their incomes to purchase these necessity goods. Figure 1 shows a positive correlation between oil prices and inflation, to be more specific, a 0.27 correlation coefficient between oil price and CPI (St Louis Fed, 2018). All households will be affected because oil has an inelastic price elasticity of demand (PED) which means that a proportionally greater increase in price will lead to a smaller decrease in quantity. This will affect rural households more than urban households as they have fewer alternative transport methods and rely on oil more. Moreover, the cost to fill up your car in June 2022 was £100.27 which is the biggest jump in 17 years (Lawson, 2022). so the opportunity cost of driving is very high. Figure 1
Even more significant, Ofgem’s increase in the energy cap has caused gas and electricity bills to increase rapidly. Bills could reach £4266 in January 2023. which is a 205% increase since October 2021 when the average bill was £1400 a year (BBC, 2022). This will impact low-income households much more severely and plunge them into fuel poverty. Fuel poverty is when energy costs exceed 10% of a household’s net income and two -thirds of families in the UK are expected to be in fuel poverty by January (Crerar, 2022). The fact that the inflation rate for the poorest quintile is expected to rise to 18%
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