A Third Inflationary Shock Approaches: Who Will Pay the Price?
In less than a decade, the UK faces its third major inflationary shock, raising urgent questions about who will shoulder the burden this time. Historical patterns reveal that cost of living crises do not affect everyone equally, as disparities in income and wealth create vastly different experiences of economic hardship.
The Global Energy Threat and Its Ripple Effects
Daniel Yergin, a Pulitzer-winning expert on oil markets, highlighted the Strait of Hormuz as a critical choke point for global oil supplies as far back as 2011. He warned that military action against Iran could trigger severe economic repercussions, a prediction now materialising. Recent conflicts have disrupted 20% of global oil flows, with Asia, which relies on 80% of Hormuz-shipped oil, already experiencing chaos. Governments are imposing driving limits and shortened workweeks, while populations grapple with soaring food prices and fuel shortages. In Bangladesh, oil and gas reserves may deplete within weeks, and Thailand has seen temples halt cremations to conserve fuel.
This fossil-fuel shock is poised to hit the UK shores just before upcoming elections, prompting Prime Minister Keir Starmer to convene Cobra meetings and Chancellor Rachel Reeves to engage business leaders. Starmer, who previously benefited from a political landscape shaped by Vladimir Putin's price hikes and Liz Truss's interest rate policies, now confronts a dual threat of rising prices and rates, potentially leading to an economic slump.
Three Critical Truths About the Crisis
First, inequality dictates impact. A cost of living crisis disproportionately affects those with lower incomes and wealth. This marks the third national crisis in just over five years, following Covid-19 and the Ukraine-induced shock. While some experienced the pandemic with relative comfort, others faced health risks and financial strain. Research from the Foundational Economy group shows that between 2019 and 2023, the lowest-earning 20% of households spent an extra 96% on essentials like food and energy, whereas the highest-earning 20% reduced spending by 45%. With food prices predicted to rise nearly 10% this year, adding £127 to average annual bills, the poorest will suffer most, as they allocate a larger share of income to food.
Second, utility pricing is regressive. Poor families pay the same rates for energy and water as wealthy ones, akin to an unfair poll tax. Progressive charging systems are needed, alongside a shift away from fossil fuels and current ownership models, as advocated by experts like Mathew Lawrence and Chaitanya Kumar.
Third, growth miracles are over. Starmer once promised "the highest sustained growth in the G7," but the OECD now forecasts the UK will have the lowest growth except for Italy. This highlights a failure to address the link between GDP growth and household prosperity. Instead of relying on managerial approaches, policymakers must focus on tangible support for struggling citizens.
A Call for Fairness in Economic Policy
Hannah Spencer, MP for Gorton and Denton, emphasised in a recent byelection speech that hard work should guarantee a decent life, and those unable to work deserve the same. This sentiment resonates as a simple truth often overlooked in Westminster. As the UK navigates this inflationary shock, leaders must prioritise equitable solutions to prevent the most vulnerable from bearing the heaviest costs.
