Feeling the squeeze

The current cost of living crisis has shown no sign of slowing, with millions of households across the UK struggling with rising bills and increasing costs of everyday essentials.

From groceries to energy prices, higher rent and mortgage payments, the increases keep coming at a time when wages are failing to keep up with inflation.

In 2022, inflation reached a staggering 11.1%, the highest level in the past 40 years.

And uncertainty around the crisis is leaving people feeling worried about the future as they struggle to keep their heads above water.

Ashwin Kumar, Professor of Social Policy and Deputy Director of the Policy Evaluation Research Unit at Manchester Met, explained how this extraordinary jump in inflation has taken food and energy price rises well above the inflation rate.

“Although inflation has gone above 10% on average for all goods, food price inflation has been even higher, going up by one-sixth in a year,” explained Prof Kumar. “We’ve also seen increases of 80% to 90% in energy prices, so households across the country have been hit by high price rises.”

But what’s been different about this crisis is that wages have not kept up with inflation.

“If you go back to the 1970s, you saw periods of high wage rises because of the price rises. But that hasn’t been happening this time,” said Prof Kumar. “What we’ve got is a particularly stark fall in real wages. Wages, when adjusted for inflation, have been falling, and there have been big differences across the economy.”

“In the public sector, we’ve seen larger falls in wages than in the private sector,” said Prof Kumar.

Inflation impact

So what effect has this had on households?

Millions of households across the UK have been affected, but those on lower incomes have been impacted the most.

“It’s lower-income households that spend a much higher proportion of their weekly budgets on food and energy,” Prof Kumar said. “[They] have seen higher price rises in terms of the goods which they normally purchase compared to better-off households, who are less likely to spend as much of their weekly budget on food and energy.”

Consequently, many households will face difficult choices, with some borrowing money and going into debt to survive the crisis.

“Half of those who are in serious financial difficulties have borrowed money to pay for daily living expenses. Some have depended on financial help from family and friends, and over a third have sold or pawned goods,” explained Prof Kumar.

“An important consequence of the rise in prices has been that people have less money to spend on other goods and services once they’ve paid for food and energy. And the result of that is a drop in economic activity because people can afford to spend less, businesses are therefore able to sell less, and that might well lead to an increase in unemployment.”

Benefits system changes

The crisis has also impacted the benefits system, where each April, payment increases are usually set in line with the inflation rate from the previous September.

This has resulted in a huge disparity between the inflation rate used to determine how much benefits would increase and the current inflation rate encountered by households.

Prof Kumar explained: “By the time we got to April 2022, inflation was at 9%. But inflation the previous September had only been 3.1%.

“So, there was a big gap between the inflation rate being used to decide how much benefits should go up and the actual inflation rate faced by families on benefits.

“And that gap was the biggest we’d ever seen going back to the 1940s.”

Therefore, households receiving benefits would have only seen a small increase in their incomes compared to the price rises.

In the year from April 2022, people on benefits saw a 3% increase in their incomes and yet faced price rises that were 11% by the end of the year and even higher increases in food prices and energy prices.

In April 2023, there was an improvement with a 10.1% increase – but April 2022 to March 2023 had still been a tough year for people on benefits.

It demonstrated that the benefits system, serving both people in and out of work, wasn’t providing enough support.

Dr Katy Jones, Research Fellow in the Centre for Decent Work and Productivity at Manchester Met, argues that the current benefits system should be more accessible and provide greater help and support for people facing financial difficulties.

“There are about six million people who are claiming Universal Credit at the moment, and about 2.3 million of them are in work,” said Dr Jones.

“Universal Credit replaces the legacy tax credit system, so it plays an important part in helping people to access an adequate income. Although I and others would argue that it’s not providing enough of a safety net, and many people don’t take up the support they are entitled to.”

Recent research by Dr Jones examined employer experiences and views of Universal Credit and related employment support, the first major independent study to explore this.

Researchers interviewed more than 100 employers and stakeholders about the benefits and employment support systems. They shared their views on how it could work better to support them as employers to get the right candidates for and help people progress in work.

“Most of the research around Universal Credit and the benefits system is more generally focused on people claiming the benefit. What’s their experience? What are the outcomes for them? How do they get on with job centres and work coaches,” explained Dr Jones.

“But what this research did was to flip it on its head and speak to employers, who surprisingly haven’t been a part of the policy development and debate around these issues. They offered some unique and interesting insights."

Raising awareness

Findings revealed increased awareness from employers about the role of Universal Credit in the cost of living crisis.

Employers have identified ways to support their staff through the crisis, with many offering one-off cost of living bonuses or payments to help with rising costs.

On the face of it, this is a positive step. However, in practice, these one off payments can impact Universal Credit payments, reducing the overall income for households.

“Because of the way that Universal Credit is designed, it fluctuates in line with someone’s income,” explained Dr Jones. “So if you earn more one month, you earn less the other month and vice versa, those one-off payments can create a lot of havoc with people’s income and can make things quite difficult.”

So, what’s the best way for employers to support their staff through the crisis?

Dr Jones explained that they should be thinking about how to increase incomes over a longer period rather than one-off payments.

“The advice is for employers to be wary about giving staff a one-off bonus and instead think about other ways of increasing their income over a more sustained period,” said Dr Jones. “It’s also about being able to have open conversations with staff, and in some cases unions too, about how employers can best support them.”

One recommendation from the research is for employers to offer support from qualified advice agencies to raise awareness about what people can access and how to apply for benefits.

“People often benefit from having personalised, tailored advice from a qualified agency to make sure that they’re claiming the right amount that they’re entitled to,” said Dr Jones.

Employers also need to think about the barriers stopping people from accessing, moving into, and progressing in work, such as increases to transport or childcare costs.

“It’s the practicalities of accessing work that employers are thinking about, and sometimes that rubs up against the rules in the benefits system in ways that are less than helpful,” explained Dr Jones.

“It’s about paying more attention to the reality of what our labour market looks like and how we can link people to those opportunities. I don’t think the way that the benefits system has been developed has necessarily paid much attention to those very practical issues.”

With better support, people are more likely to progress and stay in job roles longer.

“Fundamentally, we’ve got a very diverse workforce, which is a positive thing. But workers have different needs and responsibilities outside of work, and employers really need to catch up to that,” Dr Jones said.

“I think there’s an increasing awareness that lots of people will engage with this system for lots of different reasons. It might be because of caring responsibilities or health conditions, so getting employers to think about that and open that space for discussion has been valuable.”

Looking ahead

So what does the future look like, and, most importantly, when will things start to improve?

Now that inflation is believed to have peaked, it’s predicted that the rate of price increases will reduce throughout 2023. However, this doesn’t mean we’ll start to see price falls.

“The predictions are that we will still be suffering a slowdown in economic activity in the first half of 2023, and it’s only later in the year that the economy starts to grow again,” explained Prof Kumar. “As the year ends, we start to get slightly lower price rises. When we say we’re going to get lower price rises, that doesn’t mean price falls. What it means is that prices will still be rising, just at a lower rate.”

However, many households will still be dealing with the financial implications for years to come, so continued support and advice is vital — even as the economy starts to improve.

Prof Kumar explained: “Although the economy is going to start doing better from 2024, we will have this hangover of people who have had to struggle, sell or pawn goods or get into debt to survive the crisis.

“A lot of people will be dealing with a consequence of this for years to come, so we are going to need to focus on the aftermath of this crisis, even when the economic situation looks a little bit more benign.”