The Cost of Living Crisis Just Got Worse – Happy Bleak Friday
Happy Black Friday!
It’s the nickname given to this particular April Fool’s joke because, weather aside, it’s dark there.
The average household energy bill is now up 54%. So obviously, it’s the perfect time for it to start snowing.
And then there are all the other things that drive up the cost of living, from gas prices to food prices.
So what can you do and how much worse will it get?
Your cost of living has probably just increased significantly
Today, the energy price cap has been raised by 54%. The ceiling price is set by the regulator Ofgem. It was a silly idea when it was introduced (it’s only been around since 2019) – it’s yet another element of political short-termism that’s helped bring us back to the unappealing creak we’re spinning in now desperately.
Moaning aside, what does that actually mean? Price caps are often expressed quite confusingly. The average household on a standard variable energy tariff will drop from £1,277 per year to £1,971 per year.
Just to be clear though – because that term “ceiling” is very confusing in this context – it’s the average household, using the average amount of energy. What the ceiling price really is is a ceiling on the cost per unit.
So yesterday the ceiling price was 4 pence per kilowatt hour for gas and 21 pence/kWh for electricity. Today it has risen to 7p/kWh for gas and 28p/kWh for electricity.
Whichever way you put it, that’s a big boost. But that means there’s a lot of variance around that average.
Anyway, this means that if you are on a variable energy tariff rather than a fixed tariff, your energy bill has increased considerably.
It is therefore one of the elements of “Bleak Friday”.
Your other bills will also increase. Earlier this year, I received a note from my mobile carrier stating that from March 31 my bill would increase by December CPI (consumer price index) inflation plus 3, 9%.
With CPI at 5.4% in December, this represents an increase of 9.3%. It’s on a relatively small bill but it’s big. I’m just thankful it wasn’t tied to the 7.7% RPI, otherwise my bill would have seen a double digit increase.
Meanwhile, Hargreaves Lansdown points out that council tax bills are rising by an average of 3.5% (to an average of £1,966 for homes in Strip D).
Now, against the backdrop of a 54% jump in the energy bill and current inflation of 6% to 8% (depending on your preferred measure), that almost sounds like a bargain – but every little bit hurts. And – just one question – have your salaries increased by 3.5% this year?
That’s before we even start talking about fuel prices, or Rishi Sunak’s national insurance contribution hike, and his freezing of every allowance and tax threshold, which will eat away at all increases in salary you managed to get this year.
There is no simple solution to the cost of living crisis
So what can you do about all of this? On the energy bill side, there is no simple solution. As Martin Lewis’ MoneySavingExpert team points out, “there’s nothing significantly cheaper than the new price cap – so for the most part switching won’t save you any money.”
My usual reaction when someone says “put on another sweater” is a flurry of irritation. But the reality is that if you want to spend less energy, there is no choice but to use less energy.
This involves either turning down the thermostats and putting on thermal pants, or investing some of your savings in better insulation, alternative heating systems or those little carpet snakes that sit outside your doors, preventing drafts of air while tripping the unwary.
There is some relief available for the less well-off, including some council tax money for those in bands A to D. And an increase in the national insurance threshold from July is expected be a net gain for anyone earning around £30,000 or less.
But while this mitigates the price increases, it in no way offsets them. Sky’s Ed Conway – doing a rough calculation – estimates that all of this is “about half of the increase in the cost of the average energy bill”.
And if you’re one of the wealthiest, life is going to get a whole lot more expensive.
As Chris Giles points out in the FT, Sunak’s decision to freeze benefits – given current inflation rates – should now (per the Office for Budget Responsibility) see him rake in £18.8billion a year by 2026-27, up from £8.2 billion. a year when it was first announced in 2021.
It’s not a stealth tax, it’s an inflation tax. And that explains why Sunak’s promise to take a penny off income tax is essentially empty policy (although I still want to give him a tarnished gold star for harmonizing NICs and benefit thresholds any nod to tax simplification should be greeted with gratitude these days).
And all of this is happening at a time when inflation is also giving your investments an absolute twist.
Merryn has some thoughts on funds that could help protect against inflation in his editor’s letter last week. And my colleague Cris has made some changes to the exchange-traded funds that make up our model passive portfolio – it’s worth reading here.
Other than that, be sure to use your tax-efficient allowances and reduce your investment costs, because every percentage point you can save today will make a difference.
Oh, and maybe investing in some of the only industries to benefit from all of this. In the latest issue of MoneyWeek magazine, out today, we examine how to invest in the industries that will provide us with the energy we will need for the foreseeable future. If you’re not already a subscriber, sign up now and get your first six issues for free, plus a free report on how to invest in times of inflation.