Perfect storm: how the energy crisis, pandemic and Brexit affect UK households

With inflation set to rise, alongside the cost of shopping and transport, the economic fallout will squeeze Britons’ budgets

Last modified on Fri 24 Sep 2021 14.55 EDT

The Bank of England warned this week that surging energy bills will lead to inflation topping 4% this winter, piling pressure on already tight household budgets. The economic fallout from the pandemic and Brexit is pushing up the cost of essentials such as food and clothing as well as travel and even doing up your home. We look at how this perfect storm is affecting you.

Supermarket shopping

Widespread commodity price rises – from wheat to sugar, coffee and palm oil – are set to combine with shortages of lorry drivers and food processing workers as well as cost rises in supplies including packaging to drive up prices in supermarkets this autumn and winter. Suggestions are that food prices could rise by at least 5%.

Meat processors were already warning in the summer that difficulties in hiring workers would force up costs. Those problems have only been added to by a dramatic rise in the cost of CO2 gas, which is used in the slaughter of pigs and poultry as well as in packaging meat and dairy.

But problems are not just local. Rising post-lockdown demand amid the supply chain crisis and difficult weather conditions are pushing up food prices around the world. Coffee is at a seven-year global high, which experts say will hit consumers in the pocket. Pasta is also set to rise as a shortage of durum wheat caused by drought and soaring temperatures on farms in Canada, one of the biggest producers. One analyst predicted a 500g packet of spaghetti could increase in price by 60p, or 50%, to £1.80.

Clive Black, an analyst at Shore Capital, said there was not necessarily a straight line from commodities to price increases on supermarket shelves, as competitive pressures and levels of demand would also play a role in suppressing inflation. While wheat is up, for example, packaged breads are unlikely to rise as demand is falling and suppliers are competing heavily for business.

Clothing and other household goods

Less choice and higher prices are on the way if you wish to restock your wardrobe or revive your living room.

Retailers from Dunelm to Halfords have recently warned of difficulties in importing products pointing to inflation from higher prices of materials and transport costs. Bringing a shipping container from east Asia to the UK cost $8,000 (£5,840) last year, but is now more than $20,000 in some cases, adding to rises in the cost of metal, wood and cotton.

In clothing, price increases may not come through until spring as fabrics such as cotton and other materials are likely to have been bought well in advance. The exchange rate with the dollar, in which most clothing is traded internationally, is also relatively favourable.

Clive Black at Shore Capital said the main impact on price was likely to be driven by a much lower level of discounting on clothing, and potentially many other goods, on the high street this autumn and winter as retailers had been cautious about buying in supplies. “I expect Black Friday to be very unusual. I don’t think there will be anywhere near the big reductions and discounts on clobber we have seen in recent years.”

Going out

Staff shortages and increases in the cost of food and drink are likely to lead to bigger tabs in pubs and restaurants in the run-up to Christmas.

Three-quarters of hospitality businesses said they were likely to be raising prices for their clients according to a recent survey by industry analysts CGA and services business Fourth. That is not surprising when the price of sparkling wine was up 6% in supermarkets this month, according to the latest data from analysts at Kantar, with crisps up more than 5% and fruit juices rising by 4%.

Increases in the cost of cleaning products and other supplies are also adding to upward pressure on wages for service staff amid heavy competition for workers. Highly skilled posts such as chefs are in high demand as many EU workers who have traditionally underpinned the industry have gone home after Brexit. Now even coffee shops, which have tended to pay minimum wage, have been forced to put up wages. Both Pret and Costa recently announced they were increasing pay by about 5%.

Transport

Many households will have saved money on transport during the lockdowns but as restrictions have eased that cost has roared back. Petrol prices are at an eight-year high while rail commuters in England and Wales are having to get used to paying more after fares rose 2.6% in spring.

The fuel shortage has heaped more pain on drivers who are having to dig deeper when they fill up. Petrol has climbed to 135.9p a litre, a level not seen since 2013, according to the AA. That is 15p more than before the pandemic and, based on a driver filling up their tank twice, adds up to an extra £16.50 a month on fuel.

“As UK families come under huge pressure from rising prices, one of the biggest hikes is in the cost of petrol,” said the AA’s Luke Bosdet. “Families might be able to switch to an alternative for their shopping but they can’t do that with fuel.”

Household bills

More than 1.5m households have been affected by the energy crisis, which has claimed seven small energy suppliers. Their customers were typically paying £800 to £900 a year but now face paying more than £400 extra. That is because the switch to a new supplier will have them moved on to a price cap figure set by Ofgem which, from the start of next month, is equivalent to £1,277 for an average household.

But higher energy costs are not the only problem, with households having to find the cash to cover higher council tax, water and even broadband and mobile phone bills. The council tax bill for the average house increased by 4% to £1,881 this year, while water bills went up 3% to £408, according to comparison site Money.co.uk.

Home improvements

Over the past year Britons have been ploughing spare cash into home renovations, but the cost of loft conversions and extensions is going up as builders contend with big jumps in the cost of materials as well as a higher wage bill.

Plywood is up more than 80% in the past year, while wood is up 64%, according to Noble Francis, economics director at the Construction Products Association. There are also expectations that essentials such as cement and bricks are set to rise.

“Renovation costs certainly are rising, not just because of the materials side, which since last autumn has been the primary driver of inflation, but more recently we have seen labour costs rising significantly.”

In the three months to end of July, official data showed construction wages were 11% higher than in 2020 with workers taking home £636 per week. This is particularly relevant to the home improvement market where the wage bill accounts for about two-thirds of the project cost.

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