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Despite Prime Minister Boris Johnson‘s pre-pandemic popularity which won him a strong majority in the 2019 UK general election, his post-pandemic approval ratings suggest that almost two-thirds of adults now disapprove of his political performance. The most recent ‘party-gate’ scandal has been circulating throughout British media, but a potentially unpopular crisis is fast approaching the prime minister: inflation.
The UK’s rate of inflation rose to 5.4% in December, its highest rate in almost 30 years. Inflation is a measure of the increase in the cost of goods and services over time. Inflation rates are measured by comparing the cost of goods and services to their average cost a year ago. With the rate of inflation rising to 5.4%, a £5.10-pint last year would now cost £5.38. While this may seem a small price to pay, increases in costs across the board drastically affect household expenditure. In the UK, this has also coupled with dramatic increases in energy costs, with the UK’s energy regulator Ofgem announcing a rise of as much as £500 above the annual energy price cap on energy bills from April. This cost of living crisis is occurring in the midst of a cabinet crisis, with Johnson facing serious leadership doubts over allegations of attending and hosting parties on Downing Street at the height of the Covid-19 pandemic and the UK lockdown in Spring/Summer 2020.
Why is Inflation Rising so Much?
Source: Current
The biggest increases between November and December 2021 were in food and non-alcoholic drinks, as well as in restaurants, hotels, furniture, household goods, clothing, and footwear according to the ONS. However, a significant proportion of the rising cost of living is due to the energy crisis with a “rise of over 50% in energy costs over the last six months with gas prices hitting a record high as the world emerges from lockdown”.
The latest rises are an 18.8% increase in the cost of electricity and a shocking 28.1% increase in the cost of gas over the last 12 months. Without tackling the energy crisis, it seems the rising cost of gas and electricity will continue to drive up the inflation rate and household costs. Following calls for “helicopter money”, or emergency cash payments, to households struggling with the rising cost of living, the Guardian created a graph of possible government responses:
The cheapest option for the government would be cash bonuses to the households that will face the most financial struggle with rising costs in energy and living; either a one-off £300 or £500 payment to households on universal credit, or to households earning less than £50k a year. The most expensive option would be limiting the increase in the energy price cap, which is what Chancellor of the Exchequer Rishi Sunak is considering. The positive impact of this choice would be preventing the inflation rate from escalating further in April, when it is predicted to reach 6%, by stopping bills from increasing.
However, concerns are already being raised by the third sector, such as by the anti-poverty charity Joseph Rowntree Foundation, for immediate cash payments to those already severely struggling. Age UK is also warning that the elderly and pensioners are already having to turn off their heating because these groups are more likely to live in “fuel poverty”, a term used to describe a household whose members cannot afford to keep their space adequately warm at a reasonable cost due to their income.
If the energy price cap were to rise in April, taxes and National Insurance will rise as well. The Resolution Foundation is predicting an extra £1,200 annual increase in costs to the average household, beyond the capacity of many across the UK. What is the solution?
The Labour Party has pledged to immediately eliminate the VAT on energy bills, costing £2.5 billion overall and cutting the cost of bills by £90. This will be paid for by a windfall tax on oil and gas companies, which they claim are facing record profits because of the increased cost of energy. Of the top ‘Big Six’ British energy suppliers, these are their profits overall in 2020 and 2021:
| Company: | Profits 2020: | Profits 2021: |
| British Gas, owned by Centrica | £264 million | £262 million |
| EDF Energy, 84% owned by the French state | €16.2 billion | €17 billion |
| E.ON | EBIT: €3.8 billion | EBIT: €4 billion |
| Scottish Power: 2020; 2021 | £583 million | £650 million |
| SSE | £939 million | £1.9 billion |
According to the figure, the Big Six are making profits during this time of high energy prices, and a windfall tax to cover the £2.5 billion needed to eliminate VAT is not improbable. These profits also make the plan to give energy companies £20 billion to cover their increased costs during the crisis seem more like giving money away to companies that could cover the costs themselves, especially in comparison to struggling households.
As Labour is not in government, it will be up to Sunak to decide how to solve the crisis. It is not an easy decision, and the cost of living is not likely to lower any time soon without drastic action. Following the ‘bring your own booze’ work events and parties in No. 10 Downing Street gardens, as well as accusations of blackmail and bullying, Sunak is one of the favored contenders for Conservative leadership if Johnson were to resign, or were removed. Currently, around 35 letters of no confidence are believed to have been sent to the 1922 committee, and once 54 letters have been sent, a vote of no confidence will be triggered and there will be a re-election for the leader of the Conservative party, deciding the next Prime Minister. If this event were to be triggered, Sunak’s handling of the energy and inflation crisis will be highly influential in his bid for leadership.
- How will UK households manage the damage of high inflation on the increased cost of living?
- Will Boris Johnson leave his position of leadership?
Further Reading
Interest rates may have to rise sharply to fight inflation – The Economist
Here’s how to solve the UK energy crisis for the long term – store more power – The Guardian
Calls for one-off cash payments for people hit by UK energy bills crisis – The Guardian
