Latest figures from the Office for National Statistics (ONS) confirm that the UK’s cost of living crisis is continuing. Inflation for the 12 months to July 2022 stands at 10.1%, marking the first time it has hit double figures since 1982.

With fuel prices and household bills rising, October’s increase to the energy price cap will leave even more UK families struggling as we head into autumn and winter.

But what has caused inflation to rise to record highs, and how long might the cost of living crisis last?

Keep reading to find out.

Brexit, tax increases, and the impact of coronavirus

Many factors have combined to cause current price rises and stock market volatility.

Back in March 2020, as the world came to terms with the scale of the coronavirus pandemic, the BBC reported that the FTSE 100, the Dow Jones and the S&P 500 all had their worst days in 30 years.

A closer look at the FTSE 100 since then shows the slow recovery the UK economy has undergone.

Source: London Stock Exchange

The pandemic led to increased spending and unprecedented borrowing.

A recent government briefing confirms government measures cost between £310 to £410 billion. This led to £323 billion of borrowing in 2020/21 alone, representing an increase of £167 billion from pre-pandemic estimates and the largest amount of borrowing since the end of the second world war.

Excess borrowing leaves a hole in the public purse, which is paid for from taxes and other government income.

While then-chancellor Rishi Sunak originally announced tax rises, some of these were later rolled back. Tax cuts could now be in the offing, depending on who emerges as the next inhabitant at No 10.

Brexit is set to further affect UK workers according to the Resolution Foundation’s latest research.

It expects the average worker to be £470 worse off each year by 2030, compared with a 2016 “remain” vote. Exports to the EU are also expected to be down 38% by 2030, compared to if we had remained inside the EU.

“Freedom Day” and a slow economic recovery

In the summer of 2021, many countries worldwide saw lockdowns end and economic recoveries could begin.

As consumers emerged from restrictions, reports suggested that 6 million of us had accrued “accidental savings”. The urge to spend, however, was met by a supply chain crisis that according to the Guardian saw food, second-hand car, clothing, footwear and fuel prices rise.

These factors combined to create an annual inflation rate that jumped from 2.1% to 2.5% in June. This was followed in September by the highest annual rise since records began when inflation rose from July’s 2% to 3.2% for the 12 months to August.

Since then, inflation has been steadily rising.

Increasing food and energy prices, supply chain issues and labour shortages were all a factor. Globally, China’s zero-Covid stance saw protracted lockdowns slow their economic growth, along with the collapse of Chinese real estate company Evergrande, leading to a downgrading of global economic growth forecasts.

Rising inflation and the war in Ukraine

The ONS confirms that UK inflation currently stands at 10.1%, five times the Bank of England’s 2% target.

Rising inflation caused by the factors already discussed was exacerbated on 24 February 2022 when Russia invaded Ukraine.

Six months on, the conflict is showing little sign of ending. Economic sanctions on Russia, halted production in Ukraine, and continuing disruptions to global supply chains have all contributed to the highest UK inflation figure in 40 years.

Source: ONS

The Bank of England (BoE) predicts inflation could rise to 13.1% in the autumn, while BBC reports are even more worrying, with Citi Bank forecasting a potential rise in inflation to 18% by the start of 2023.

The BoE has long forecasted a return to its 2% inflation target sometime in 2024.

Financial advice can help you manage the cost of living crisis

With the cost of living set to continue rising, UK households’ struggles to make ends meets could go on for longer yet. And this is before the effects of the latest energy price cap are known.

With global events adding to economic uncertainty, now is a great time to check in with your adviser to make sure your long-term plans are still on track.

Remember, the global economy and geopolitical uncertainty are unlikely to have a direct influence on your long-term plans. If your retirement goals are the same, your plan can be too.

Staying focused on your long-term goals, remaining patient, and ignoring the noise of short-term volatility are key.

Get in touch

If you are worried about the continuing cost of living crisis and its impact on your retirement, or any other aspect of your long-term financial plans, get in touch. Email info@thepensionplanner.co.uk or call 0800 0787 182.

Please note

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

This blog is for general information only and does not constitute advice. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.