The Year of the Squeeze

By Luca Pavoni 
16/02/2022

Number 10 is not the only household under extreme pressure this year. 2022 looks as if it will go down as the ‘Year of the Squeeze’ as soaring inflation rates, stagnant wages, and an incessant global pandemic have made the conditions ripe for a national cost-of-living crisis. Failure to deal with the crisis will raise yet another challenge to the legitimacy of Boris Johnson’s Government to fulfil its 2019 pledges of uniting, levelling up and unlocking the potential of the United Kingdom.

At the turn of the year the Consumer Price Index (CPI), the chief measurement of inflation, climbed to 5.4% in the UK - the highest in thirty years and nearly triple the Bank of England’s target rate of 2%. Price increases have been felt in nearly every sector, from groceries to transport to clothing. Even the family favourite IKEA received complaints for increasing its flat-pack furniture prices by up to 50% over the last few months. The most commonly cited culprits for this sudden hike in prices are Brexit, which is accused of complicating customs and trade with other countries, and COVID-19, which has triggered labour shortages and wreaked havoc on global supply chains. This increases costs for businesses which are then transferred to consumers. But the biggest bill that looms over both businesses and households comes from a third ominous development: the increasingly exorbitant price of energy. 

The RAC has heralded a ‘dark day for drivers’, with petrol prices creeping to a record £1.50 per litre and families paying on average £15 more to fill up their cars than they did in 2020. This is partly due to the chaos that ensued last year when a shortage of heavy-good-vehicle (HGV) drivers triggered a dangerous climate of panic buying that artificially spiked drivers’ thirst for fuel – and thus inflated the price at the pump. But external factors have also doubled the global price of oil, with one barrel now worth an average of US$85 compared to $40 in 2020. The West has accused the Organisation of Petroleum Exporting Countries (OPEC) of purposely constricting the flow of oil to inflate prices, but OPEC says the logistical challenges of restoring production levels to meet post-lockdown global demands are what’s to blame for short supplies. 

The situation is similar for natural gas: supplies across Europe have been alarmingly low since March 2021 and an unusually frosty winter has depleted what little reserves remained. There are also fears that Russia, Europe’s biggest natural gas supplier, is using gas as a political tool to win bargains ahead of its standoff with Ukraine. But for British households, a provocative and re-emergent Russia is not as frightening as their upcoming energy bills. In response to the growing price of natural gas for suppliers, regulator Ofgem is set to raise the price cap for energy bills in April. At the same time, the Government is pushing for households to replace their existing heating systems with low-carbon heat pumps – at a cost of potentially thousands for homeowners. All of this together means that families will spend up to 50% more to heat and power their homes in 2022. Combined with the soaring prices of several other everyday goods, households are set to be on average £1200 worse off this year. For many families, this could be enough to push them over the poverty line. 

While bills increase, British households will suffer a simultaneous erosion of their wages. Salaries are not keeping up with soaring inflation: compared to the predicted 6% inflation rate for 2022, wages are rising by just 0.1%. Furthermore, the Government has announced a new National Insurance (NI) levy increase that will coincide with the rise of energy bills in April. Although the Government has tactically sugar-coated the increase as 1.25 percentage points, in reality, this means that employees may have to contribute up to 10% more in NI. Many households have also not adjusted since the Universal Credit cuts from last September. As a result, both opposition MPs and the wider public are questioning how the Government will alleviate, rather than exacerbate, the cost-of-living crisis. 

Boris Johnson and his Chancellor Rishi Sunak have responded to accusations of government inaction by pointing out that the warm home discount (WHD) is being expanded. The scheme currently gives two million people in England and Wales on pension credit or working age benefits a £140 rebate on their energy bills. Boris aims to make this figure three million people by the end of 2022. But opposition leader Keir Starmer, in an attempt to present the Labour Party as a credible alternative to the Conservatives, unveiled an ambitious £6.6 billion proposal in the new year to deal with the national crisis. His proposal calls for an even larger extension of the WHD, as well as the elimination of both the planned National Insurance hike and VAT on energy bills. 

There are even calls for Sunak to restore pandemic-era funding to families and businesses, but the Chancellor has remained steadfast in his prudent spending policies. A self-described pragmatist, he argued that borrowing even more money and leaving the bill for future generations ‘is not just economically irresponsible, it’s immoral’. He may have a point: Britain’s national debt has already eclipsed its GDP of US$2 trillion. 

Fundamentally, the Government cannot afford to continue with a ‘business as usual’ attitude. In his 2019 manifesto, Boris asked the British public to ‘support a majority Conservative Government so our country can move forward instead of going backwards’. Should the Government fail to contain this looming national crisis, it is hard to see how many British households will consider themselves better off in 2024 compared to 2019. Should that be the case, voters will punish Boris for this at the polls at the next election – if he makes it that far.