Semantron 23 Summer 2023

The UK’s cost -of-living crisis

in October (due to having to spend more on energy), compared to 11% for the richest quintile, further reveals that those holds on lower incomes are adversely affected by inflation (Johnson, 2022).

Additionally, the elderly are frequently singled out as a main group that are affected most by inflation. This is primarily because elderly people have low fixed income levels (though they may own a considerable asset in a fully-owned house, but one which can depreciate as well). Furthermore, from 2006 EFS data, pensioners spend a greater proportion of their income on food: 17%, compared with non-pensioners, who spend 12% (Leicester, 2008). Thus, this shows food price inflation, which is what is happening in the UK right now, will affect the elderly the most. However, the government has said they are going to increase state pensions in line with inflation, i.e. a 10% increase to people’s pensions (Hughes, 2022). In short, inflation is unfair and nearly everyone loses from it, but some, such as the elderly, are hit to a greater extent than others. Firms are affected by inflation because it causes their costs of production to increase due to higher prices of raw materials or the nominal wage increases. This all leads to a reduction in investment which will hurt the UK’s long -run growth. Furthermore, it depends on the PED of the good or service the business is selling because if it is elastic then the burden will be difficult to pass onto the consumer and hence will cost the business more. Therefore, this reveals the impact that inflation has on business owners as this can be significant. Finally, the government must introduce effective policies to bring down the inflation in the UK to lessen the harsh impact for many of the poorest and middle-classed households. The cost-of-living crisis will mean that more people will have to borrow money or spend their lifetime savings to pay their bills. This may cause people not to repay their loans and to have a serious debt problem where the money they have to pay keeps increasing with interest rate rises (the Bank of England increased the Bank Rate to 1.75% in August 2022). Raising interest rates will increase the cost of borrowing and reduce availability of credit. This will lead to a reduction in disposable income and decrease consumption. Hence, this causes aggregate demand (AD) to decrease and inflation to decrease. Moreover, raising interest rates too much could plunge the UK economy into a recession because it could reduce demand so much that there is no consumer spending or investment in the economy. This would be detrimental to the UK economy in its current state. However, even raising interest rates will most likely be ineffective because inflation in the UK is cost-push inflation rather than demand-pull inflation. Cost-push inflation is a global problem that all countries will experience to some extent and thus is generally much harder to control than demand-pull inflation because it cannot be combatted by monetary policy which focuses on decreasing AD through consumption, investment, and exchange rate mechanisms. In conclusion, I believe that the current inflation situation will affect all households in the UK but those on the lowest incomes will be affected the most as necessity goods have had the greatest price rises, and spending on these goods will form a greater proportion of lower income households. This is exacerbated by the reduction in real wages caused by inflation. Furthermore, the UK could experience one of the deepest recessions in decades if the government does not introduce effective policies to counter inflation, yet their ability to do so is limited by the international causes of the inflation we are experiencing. Inflation in the UK is the highest in the G7 countries and a key question to assess is why this is the case and what are other countries doing better than the UK? Is Brexit the key reason? For


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