The “cost of living crisis” refers to the fall in ‘real’ incomes (this is the money earned after taking into account the cost of inflation) that the UK has faced since the end of the last UK lockdown. It has mainly been caused by rising inflation and the increase in household bills.
Graduates (adults usually within the age of 21-30) are one of the most disproportionately affected groups by the “cost of living crisis”. One of the reasons for this is because of the recent changes to the student loan system. This April, the interest rates regarding student loans skyrocketed. Also, graduates are one of the most likely groups to be renting their accomodation. This year, rents in the UK hit the highest point on record. These factors, alongside rising inflation, which is mainly driven by rising energy costs and supply shortages, will mean that an increasing number of graduates will be left financially precarious.
How is inflation measured?
The Consumer Price Index (CPI) is used to measure inflation. The CPI is based on a basket of goods which consumers are currently buying. Then the proportion of income spent on each item is used to work out a weighting. The changes in weighting are used to track changes in prices over time; a rise in these prices is known as inflation.
In the year leading up to May 2022, CPI inflation in the Uk had hit the highest level in all of the G7 countries, a staggering 9%. This was a record that had not been seen since the stagflation of the 1980s.
Which prices are increasing fastest?
To put it simply, energy costs. Energy costs have been the largest contributor to the rise in prices. As a matter of fact, household and transport energy usage had contributed to around half of CPI inflation in April. Although it has since dropped to 3.9p per kilowatt hour, the weekly average price of gas reached a peak of 15.3p per kilowatt hour in early March. Similarly, fuel prices rose to 161.8p per litre in April versus 125.5p per litre a year earlier, the highest ever recorded.
Why are prices increasing quickly?
As countries around the world exited lockdowns, demand for goods and services surged causing demand-pull inflation. The shift in demand was caused by increasing consumer confidence. This encouraged consumers to spend their savings accrued during the pandemic as they believed the economy was recovering. This causes an increase in prices as the market looks to correct its allocation of resources.
There is a shortage of affordable housing. Since there are fewer affordable homes available, prices have increased and fewer individuals can afford to buy a home; as a result, demand for rented housing has increased – more than four million households in England are now in the private rented sector.
Inflation can also cause inflation. The experience of inflation can cause consumers to behave in a way that causes inflation. If consumers expect that prices will continue to rise in the future, they will spend now rather than later. Also, if workers think that inflation will continue to rise, they will try to protect their real wages by asking for pay rises. This has been seen in the recent bus strikes in West Yorkshire and train strikes across England. In the same way, if businesses expect there to be inflation, they will raise their prices. This will maintain their real profit levels.
Moreover, the war in Ukraine is a major factor in today’s rising prices. Russia is a major exporter of oil and natural gas whilst also being in the top 5 producers of steel, nickel and aluminium according to the Institute for Government. Likewise, Ukraine plays a key role in the global economy. Ukraine produces a large amount of the world’s sunflowers, corn and wheat. The war in Ukraine has halted a significant amount of trade and has therefore pushed up the prices of these essential commodities. When the prices of commodities rise, producers will have an increased cost of production and the prices of goods and services will rise.
And finally, Brexit. The UK officially left the European Union (EU) on 1 January 2021, around 5 years after the Brexit referendum of 2016. Brexit has slowed our economy and it has caused it to be unresponsive to the sudden rise in demand after the pandemic. Brexit reduced trade; the Uk trade sector has recovered much slower than its European and Pacific counterparts from the pandemic according to the Peterson Institute for International Economics. UK trade as a percentage of GDP remains below pre-pandemic levels, falling by more than 6% from Q1 in 2017 to Q4 in 2021. When there is less demand for a product, there is less demand for the workers/machinery making the product – this leads to workers being made redundant/machinery being sold.
There has also been a dramatic impact on immigration. The UK is no longer one of the most open economies to immigrants. From 2015 to 2020, the UK was the only large EU economy to see a fall in its immigrant population growth compared to the last five years. A fall in the size of the labour pool reduces the supply of labour and gives workers the means to negotiate for higher wages. This can increase the price level and lead to inflation.
How has this affected graduates?
Young people are set to face a challenging future. This April, the interest rates regarding student loans skyrocketed. Graduates earning £27,295 or less have seen their interest rates soar from the rate of 1.5% to 9%, according to the Institute for Fiscal Studies. The maximum interest rate (paid by those earning £49,130) has also increased from 4.5% to 12%.
Furthermore, rents in the UK are now at the highest point on record. According to Rightmove, rents in London have jumped 19% since the pandemic began – the same amount of growth as in the eight years before. This took the average rent in London up to £2,257 per month. Rightmove also found that there had been a 3.5% increase in rent outside of London since the last quarter. Taking the national average to £1,126 per month.
| Student Loan Repayments | Rent | Energy Costs | Inflation | |||
| 12% | + | 19% | + | 70% | + | 9% |
| ⬆ | ⬆ | ⬆ | ⬆ |
As graduates will most likely be in student debt and rented accommodation, they are set to be one of the most severely impacted financially by the “cost of living crisis”. The aforementioned factors cumulatively will shrink students’ disposable income. With prices set to rise further this year, graduates will begin to face even more problems.
Footnotes:
https://news.sky.com/story/young-people-most-affected-by-cost-of-living-crisis-study-finds-12432524
https://www.independent.co.uk/news/business/homeowners-young-people-cost-living-b1991346.html
Néos Economist 