Unpacking the cost of living crisis

As Britain heads into a long winter of discontent, with households squeezed and recession looming, what can business expect?

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UK businesses are facing a double whammy of rising costs and pressure on household finances, fuelling fears of a recession. With consumer spending still strong in the economy, many companies have been able to pass on rising prices to customers, mitigating the economic pain. But what happens next — and how can businesses make sense of the cost-of-living crisis?

Those questions will be tackled by a panel of distinguished economic faculty at a virtual and on-campus event on 28 November hosted by the Wheeler Institute for Business and Development. The discussion will explore the impact of the cost-of-living crisis from a national and global perspective, and the debate will also cover fiscal and monetary policy, mortgages and debt.

“The cost-of-living is obviously a major problem for businesses because it’s a squeeze on income, so people have got less to spend,” says Andrew J Scott, Professor of Economics at London Business School, and a Research Fellow at the Centre for Economic Policy Research. Joining him to discuss the outlook and implications are Lucrezia Reichlin, Professor of Economics; Paolo Surico, Professor of Economics; Linda Yueh, Adjunct Professor of Economics.

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UK households are facing pressures on their budgets not seen since the second world war, as prices for food, rents, mortgages, petrol and energy all soar. The headline inflation rate hit a 41-year high in October, accelerating to 11.1%, because of rising energy bills and food prices, despite the UK government’s energy guarantee. That capped bills for gas and electricity at £2,500 annually until April, but many households still plan to cut their discretionary spending this winter, stripping out things like entertainment and eating out – and focusing on the basics.

As a consequence, sales have already been falling on the high street. The consumer confidence index fell to a near 50-year-low in August as households worried about the cost-of-living crisis. “It also creates a lot of strategic decisions for firms because they have to decide whether to pass their own cost increase through or take a squeeze in profit margins,” says Professor Scott.

UK businesses are expecting output price growth to accelerate in the year ahead, suggesting they are passing on rising costs to consumers as they grapple with never-ending bills. In the first quarter of 2022, average commercial electricity bills were around 30% higher than the year before.

Energy intensive industries such as manufacturing and construction are among the hardest hit by rising energy prices — which Professor Scott says have been fuelled by Russia’s invasion of Ukraine. Small businesses are also under pressure, and in the service sector, companies are being hit more by wage increases than higher raw material costs. That reflects tightness in the labour market.

Even so, Professor Scott says UK income growth has been depressed over a longer period of time. “It’s more of a structural problem; we’re not seeing much productivity growth,” he adds. That has left households exposed to inflation and the cost-of-living crisis.

That, combined with weakness in household and business confidence, as well as higher interest rates have already led to economic contraction in the third quarter, suggesting the UK has entered what is forecast to be a prolonged recession lasting up to two years – as per the Bank of England’s calculations. “I’ve rarely known a situation where so many people feel that a recession is inevitable,” says Professor Scott.

More generally, he said the world economy was reeling from higher oil prices, a slowdown in China and higher interest rates in the US. “The worrying thing is that, globally, there are lots of things going wrong.” That was fuelling fears of a global recession next year. “There are a lot of different factors in every part of the world, all pointing down,” Professor Scott adds.

The Cost of Living Crisis and the UK Economy is on 28 November at 12:00-13:00 BST. Find out more and register here