As Fear Reaches its Peak: What Should we do about inflation?

Inflation really is causing panic and upset at the moment. The Centre for Economic and Business Research has published data from YouGov on consumer confidence: the HL Savings and Resilience Barometer data is available on request and outlines the problems of “cash” and “income” faced by a majority of the population in light of recently reported price hikes and general cost of living.

Sarah Coles, senior personal finance analyst. Hargreaves Lansdown had this to say:

“For millions of people, life is already an uphill battle to make ends meet, and things are only going to get worse. The rest of 2022 will make the battle harder and the mountain you need to climb even bigger. Research from CEBR reveals we haven’t been this pessimistic about the state of our finances for nine years – and we’re right to be worried.

The HL Savings and Resilience Barometer, produced with Oxford Economics, reveals the extent of the problem. Only around half of us currently have enough cash left over at the end of the month to deal with price rises. By the time we’ve got through the eye-watering price hikes due this spring and beyond, this is expected to fall to around one in three.

Photo by Emily Wang on Unsplash

Who is hardest hit by all this inflation?

Among those on lower incomes, Citizens Advice received more requests for crisis support than ever before last month – so more people are hitting the wall financially than at the peak of the pandemic lockdowns. And the Barometer shows that six in seven people will be running on empty by the end of 2022.

Whatever your income, price rises are already causing pain for two thirds of people. Within this group, three quarters said their energy prices were responsible for a chunk of the price rises, largely because of the 12% hike in the price cap in October. However, energy prices aren’t the only things squeezing households. Everything from the cost of home repairs to food prices is on the rise, and there are a huge array of things which have risen more than a fifth in the past year – ranging from petrol to margarine and irons.

And inflation hasn’t peaked yet. The Bank of England expects it to hit 7.25% in April when the energy price cap feeds through. This could cause us even more of a financial headache, because it puts more pressure on the Bank of England to raise interest rates. This will make life more expensive for borrowers, so those who have borrowed to make ends meet will face a double-whammy.

It means we all need to think how we can make ends meet after prices rise. For those with more wiggle room in their budget, this means revisiting what they spend each month, cutting out some of the non-essentials, and shopping around on everything from petrol to groceries to keep costs down. For those whose finances are on more of a knife edge, they’ve already done all the easy things – and a lot of the hard ones. A third (32%) of those who said their costs had risen recently also said they’re cutting back on energy use, and more than half are cutting back non-essentials (53%). If you’ve already done everything you can think of, the key is to make sure you’re getting any help you can.

What is the government doing?

It will lend everyone £200 to offset their energy bills in October. This will be repaid in £40 instalments over the next five years. It essentially spreads the rises over a longer period, so it will take some of the pain out of the immediate hike, but will mean higher prices for longer. It has come in for criticism because you can’t refuse the loan, and if energy prices remain high, we’ll end up having to make repayments on top of higher costs. There’s also the issue of people who move out of shared accommodation or away from home after October, who don’t get the loan, but still have to make repayments.

It has also announced a council tax rebate of £150 for those in properties banded A-D, paid in April. It will also provide local authorities with a discretionary fund they can use to support people who are exempt from council tax and for those on low incomes who live in higher value properties. This doesn’t have to be paid back, so will ease some of the extra cost. However, it will still leave us having to produce hundreds of extra pounds from thin air in order to pay the bills.

Rishi Sunak announced that the government will also go ahead with plans to expand the eligibility to the warm homes discount to 3 million. However, because unless the government changes the way it works, it will be paid for by other energy customers – it will end up costing those on average incomes more.

It has chosen not to make one change which would have protected millions of people from another hike set to cost us hundreds of pounds: the National Insurance rise planned for April. It is resisting calls for it to be shelved, but it’s the last thing we need when price rises are already crippling our finances.

What can you do?

There will be plenty of people who consider themselves to be reasonably comfortable, but who are worried about rising bills. This is likely to creep up on them, as price rises gradually feed in through into their monthly costs, and fixed mortgage and energy deals come to an end. It’s going to get worse slowly – and then very suddenly.

If you’re in this boat, it’s worth working out what you spend each month, either by keeping a spending diary, or by checking your banking apps and statements. That should help you identify the non-essentials you can cut back on without making a major difference to your life.

You should also look at shopping around for better deals on everything from groceries to media, to bring your costs down. You can’t shop around for an energy deal cheaper than the price cap at the moment, but if you haven’t already switched to paying by direct debit, it’s worth doing so, because people who pay by cash or cheque are charged £130 extra a year.

Likewise, if you haven’t yet tried energy-saving approaches like turning the thermostat down by one degree, switching radiators off in rooms that aren’t used regularly, being more ruthless about how often you run the dishwasher and washing machine, or installing draught-proofing and insulation, then now is the time.

When you’re considering your regular costs, you may be tempted to revisit things like pension contributions. If you upped your monthly payments to take account of lockdown savings, this may be a sensible readjustment. Likewise, in some cases, even when people have already cut back on their spending, the pressure of rising costs means something has to give. It makes more sense to roll back a pension payment than to miss debt repayments or bills. However, cutting pensions shouldn’t be a first port of call, because you could be losing any matching employer contributions and tax relief on top. In some cases, you may have no choice, but in others it’s important to consider the alternatives.

If your finances are on a knife edge

For people whose finances are already stretched horribly thin, there just aren’t enough easy energy efficiency steps or non-essentials left to cut. There’s a real risk they are forced into impossible choices about heating and powering their homes.

It’s worth investigating whether there is any help available. Check whether your supplier’s warm home discount is still open for applications, and whether you qualify, because this can provide £140 off your energy bills. You should also check whether you qualify for a grant from your provider or your local council – both of which have specific support schemes for people who are struggling.

Citizens Advice knows both the benefits system and the energy support rules in great detail, so are a brilliant place to go for help. It can also be enormously useful to have someone to talk to at a time like this.

There may also be charitable grants available, which you can search for on the Turn2Us website.

If you’re facing problems with debts, a debt charity can also help enormously. Organisations like StepChange can help you work out the best possible way to get out of problem debt.”

Jasmine Says:

Our own Jasmine Birtles adds: “These forecasts are very depressing but not surprising. I have been saying for over a year now that inflation would be higher and last longer than the central bankers would have us believe. There will be more price rises, and a lot more interest rate rises, and it is going to be particularly tough for lower income households. Those are a given.

However, there are ways of coping. Firstly there are free debt advice agencies like those we mention on MoneyMagpie and Turn2Us.org.uk is a great help with its benefits calculator and access to grants. Your local council can point you in the direction of local grants and, sometimes, cash from their own emergency funds.

But the best and most long-lasting way we can all keep going is through sharing with friends, family and neighbours. I said this back in 2010 when the fall-out from the 2008 financial crisis was really biting and I say it again today: we can’t manage on our own unless we’re seriously rich. Increasingly we have to realise that by supporting each other and sharing (food, money, car, childcare, homes and more) we can all manage and have a good standard of living.

Finally, it’s even more important for people to take on at least one extra earner as soon as possible. We have literally hundreds of ways that people can supplement their income on MoneyMagpie so do look at our Make Money section to find out ways to bring in more cash on the side. It can make the difference between paying bills and going into arrears.”