There’s a cost of living ‘perfect storm’ brewing this winter. Hard-working families are struggling to afford increased fuel costs, tax rises, food prices and housing costs. And it seems that the bad news just keeps on coming.
So, just how many factors could impact family finances this winter? Here’s what’s behind the cost of living crisis and what you can do if you’re facing financial hardship.
Families face a cost of living crisis
A cost of living crisis is looming as families face increases in almost all areas of their household budgets. It’s a perfect storm because so many challenges seem to be coming at once:
- House prices have risen 11% in the last year. This has also pushed rental prices up by 2.1% in the same period.
- Council tax is set to rise in many areas – my bill in Suffolk is going up by 4% next year.
- Gas prices are rising rapidly and some energy companies are going out of business. Customers coming to the end of their deals are seeing huge increases in their energy bills.
- Food prices are expected to increase significantly and there are food shortages in many shops.
- Taxes are on the rise with a 1.25% increase in National Insurance from 2022.
On top of these increasing costs, many families are also facing a reduction in their income and savings:
- Furlough payments during the lockdown were only 80% of normal wages. As result, many families have been forced to spend their savings or go into debt.
- Wages freezes have affected many workers as firms struggle with lost income and increased Covid costs.
Why is there a cost of living crisis?
So what has caused the cost of living crisis? Many of the problems have been at least partly caused by the long-term effects of the Covid pandemic.
- House prices have been put under pressure by Covid lockdowns. More families decided to move to get more space as they struggled to work from home in smaller houses.
- Food price increases are partly due to HGV drivers shortages. There was a backlog of HGV tests during the lockdowns.
- The National Insurance tax increase will be used initially to help clear the NHS Covid backlog. Later on, it will be used to fund social care.
But there are also several non-Covid reasons behind the cost of living crisis:
- There is long-term upward pressure on house prices due to a housing shortage.
- An extremely cold winter across Europe and Asia has led to gas shortages and price increases.
- Food price increases are partly due to a shortage of carbon dioxide, which is used in food production and storage. Carbon dioxide shortages have been mainly caused by increased gas prices (in turn due to the weather).
- Tax rises have been expected for a while to fund social care, so Covid is only partly to blame here.
What to do if you’re struggling
If money is already tight and you’re worried about your finances this winter, then here are some things you can do:
- Write a detailed budget. If you’re really struggling, then zero-based budgeting might be a good method to try.
- Get some advice. Citizens advice has lots of great information on its website, and you can speak to an advisor. Stepchange can also give advice on debt management and budgeting.
- Talk to your mortgage provider. They might consider letting you pay interest only on your mortgage for a while until your circumstances improve.
- Plan to have a super frugal Christmas. Explain to your kids that money is tight and you need to give smaller gifts this year. Plan some super-cheap treats together like a night walk to see the lights or baking Christmas treats together.
Some offers on The Motley Fool UK site are from our partners — it’s how we make money and keep this site going. But does that impact our ratings? Nope. Our commitment is to you. If a product isn’t any good, our rating will reflect that, or we won’t list it at all. Also, while we aim to feature the best products available, we do not review every product on the market. Learn more here. The statements above are The Motley Fool’s alone and have not been provided or endorsed by bank advertisers. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Barclays, Hargreaves Lansdown, HSBC Holdings, Lloyds Banking Group, Mastercard, and Tesco.