Economic Hardships Persist as the Cost of Living Continues to Rise

The recent surge in the cost of living has left many households grappling with tough decisions as they contend with skyrocketing food and energy prices.

Furthermore, the escalation in interest rates, aimed at combatting rising costs, has introduced complications for mortgage holders, renters, and businesses alike. While recent data indicates that pay increases are now aligning with the cost of living, and interest rates have temporarily stabilized, it does not guarantee an immediate improvement in everyone's financial circumstances. Here are several reasons why some individuals might still face financial adversity:

1. Employment Opportunities and Wages Are Stagnating

Workers' efforts to secure pay raises that match the cost of living have been supported by employers aiming to attract and retain talent amidst skills shortages. However, this trend is shifting as higher interest rates exert pressure on businesses. The shedding of over 200,000 jobs between May and July signals a change in this dynamic. Although the rise in unemployment has been modest thus far, it is expected to gain momentum, as there is typically a lag between interest rate changes and hiring decisions. Surveys also indicate a recent moderation in new pay agreements, aligning with expectations that inflation will continue to rise. Even if inflation slows, some sectors, such as food, may not return to previous price levels.

2. Taxation Issues

An unheralded concern in the current economic climate is the "stealth tax." Since 2021, the government has refrained from adjusting income tax thresholds in line with inflation. This decision has resulted in over two million new income taxpayers since 2021 and pulled 1.3 million people into the higher tax bracket. The current plans project this measure continuing until 2028, potentially increasing the number of taxpayers and tax bills. With tax changes and rising prices taken into account, income for the typical working-age household is anticipated to be 4% lower by 2024 than it was in 2021, potentially lasting until 2025.

3. Borrowing Costs Continue to Increase

The surge in interest rates has posed challenges, particularly for mortgage holders who have borne the brunt of the battle against inflation. Roughly half of homeowners with mortgages, and a higher percentage of landlords with loans, have experienced increased monthly repayments. Whether the Bank of England has completed rate hikes or simply paused, many more may encounter similar financial stress. Approximately 400,000 borrowers are on fixed-rate deals set to expire this year, with 1.6 million expiring next year. As they transition to higher-rate products, repayments could spike. Analysts forecast that total debt repayments in 2024 will consume nearly four times as much of households' budgets as they did in 2021. While repossessions may rise, protective measures should keep them relatively low compared to previous economic downturns.

4. Housing Challenges & Rising Rents

Economists predict that house prices could decrease by approximately 5% in 2024 due to the delayed effects of prior rate hikes. Although this may offer some relief to aspiring homeowners, high mortgage rates continue to pose challenges in entering or advancing in the housing market. Rising rents are also impacting renters, with London experiencing its fastest rent increase since at least 2006. As landlords face soaring costs and some exit the market, the availability of rental properties may decrease.

5. Severe Economic Impact

With numerous households likely to face ongoing budget constraints, consumer spending, a cornerstone of the economy, could suffer. This scenario concerns many economists regarding the prospects for economic growth. As a general election approaches, some voters may find themselves under greater financial strain, seeking answers from political leaders on how they plan to improve their financial situations.

Navigating the current economic landscape presents challenges for individuals and policymakers alike, as they grapple with the multifaceted implications of rising costs and interest rates. It is essential to monitor economic developments closely and consider potential measures to mitigate financial hardship.