How did the cost of living crisis happen? 3 key factors at play


The “cost of living crisis” is a phrase that no doubt has rung in your ears for a few months now. With inflation at a 40-year high, and the Bank of England (BoE)’s base rate at its highest since 2008, UK households are experiencing affordability issues across the board.

Plus, with economists forecasting a recession set to last until the end of 2023, it is understandable that you may feel concerned about how your finances will fare in the months ahead.

Although it may feel as if you can’t switch on the news, your phone, or your radio without hearing about the cost of living crisis, you may still be confused about how this situation occurred.

Indeed, experts are referring to this time as a perfect storm of economic factors that have contributed to the financial issues many people are facing right now.

Most importantly, it is crucial to remember that the factors causing the cost of living crisis are mostly temporary, and like most economically challenging situations, are likely to pass in time.

By understanding how the cost of living crisis has come about, you might feel more confident in navigating it, as well as feeling hopeful that this era of quickly rising prices may not last forever.

So, here are three of the most influential factors affecting the cost of living in 2022.

1. The Covid-19 pandemic

Of course, the Covid-19 pandemic threw many aspects of our lives out of place. From our working routines, to the way we communicate with each other, to our social lives, nothing was left untouched by this unprecedented global health crisis.

One way the pandemic has had a lasting impact on modern life is economically. During the peak of the pandemic, the UK government introduced quantitative easing measures. Quantitative easing involves creating funds to substitute a significant drop in consumer spending, inflating the market and keeping the economy running as normally as possible.

However, propping up the market in a time of crisis can lead to inflation down the line. A market full of capital, even if this capital is provided by the government as an emergency top-up, like the furlough scheme, is likely to cause price rises.

Indeed, with the support of the government, the Guardian reports that Brits built up the second highest level of savings on record in the three months to December 2020.

So, compounded with the inflationary effect of quantitative easing, once lockdowns were lifted, consumer spending inevitably rose sharply, pent-up demand was released, and prices rose quickly in response.

Although it was impossible to avoid the effects of the Covid-19 pandemic on our lives, try to remember that the pandemic-induced economic volatility we are experiencing is unlikely to last forever.

2. The Russian invasion of Ukraine

Running in parallel with the ongoing pandemic, Russia invaded Ukraine at the start of the year. In a move long-predicted by political officials, president Vladimir Putin sent troops across the border on 24 February 2022.

Along with the humanitarian crisis that has ensued from Russia’s attack, there has been an immense economic impact on the west as a whole. Indeed, Russia is a major exporter of both fuel and food – and with sanctions imposed on the Russian economy, supplies have run short.

On a personal level, you will have noticed that fuel and energy prices have soared in recent months.

Although these rises are not entirely down to the war in Ukraine, the stagnation of energy supply that would usually come from Russia has had a significant effect. Of course, when supplies are short, prices often increase as a result.

It is difficult to predict for how long the war in Ukraine may last, or whether it will continue to affect the cost of living here in the UK.

However, in a report published by the Guardian, the Organisation for Economic Cooperation and Development (OECD) predicts the UK will be the major economy that is hardest-hit by the ongoing invasion. The OECD explains that the factors affecting the whole of the west, such as rising inflation, will be compounded with Britain’s higher taxes and soaring energy bills in the coming months.

Despite the anxiety the war in Ukraine may cause, both economically and socially, you are not alone. Your financial planner can help you stay calm if your investments have taken a downturn, and will be there every step of the way to answer any questions you may have.

3. Wage stagnation

Lastly, when it comes to the cost of living, the price of goods and services is only one side of the coin. It is crucial to note that it is not just the cost of commodities, but also your wealth’s ability to cover those costs, that may affect you long-term.

Indeed, British wage growth has been described as “stagnant” in recent years – an issue predating the Covid-19 pandemic and the war in Ukraine.

A study conducted by the OECD, published by the Trades Union Congress (TUC) in March 2022, found that UK workers are missing out on “£4,000 wage growth compared to the OECD average since 2007”.

While UK wage stagnation has been affecting Brits since before the cost of living crisis began, the Office for National Statistics (ONS) now reports that UK inflation reached 10.1% in the year to July 2022. So, if your salary has barely increased in recent years, you may feel it being stretched even more thinly now that inflation has risen to this 40-year high.

Luckily, it’s not all doom and gloom. While it is undeniable that the UK may experience even choppier waters in the months ahead, your long-term goals are what matter most.

No matter how severely you are affected by the cost of living crisis, your financial planner can help you manage the pressure it places on your finances, now and in the future.

Get in touch

The cost of living crisis might be stressful, but you don’t have to go through it without guidance. For expert advice on how to manage your money in an uncertain time, email or call 0161 8080200.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

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