Energy prices to soar but it’s not the only pressure on the cost of living

25th February 2013

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Energy prices are set to soar in the UK and stay at high levels for years to come according to the head of the energy regulator Ofgem.

Financial journalist Jill Insley finds that most household bills have risen substantially.

The average duel fuel bill in the UK is already £1,420 a year, up 19 per cent since 2009. But Ofgem warns that the UK’s over reliance on gas as coal, oil-fired and nuclear power stations are decommissioned, will push prices higher still.

Alistair Buchanan, chief executive of the regulator, says that falls in the UK’s power production capacity are likely to lead to the importation of more gas at a time when demand is growing across the globe.

He said that Britain would be “very tight” on power station capacity in three to five years’ time. “We’re going to have to go shopping in world markets at a time when they will be very tight [on capacity] themselves.

“There isn’t a single person or people to blame. In my view it was a single event – the financial crisis. Before the financial crisis the government had backed a visionary approach to energy on wind, water and nuclear… then came the financial tsunami.”

The impact of the “financial tsunami” is not limited to energy prices: many other aspects of household finance have been affected. In the last few years young families have faced soaring food costs, extortionate childcare fees, rising petrol and diesel prices, and in many cases the axing of child benefit.

At the other end of the age scale, the cost of living in January 2013 compared to September 2007 has risen substantially more for the over-50s than the overall population. Saga  says that while people in younger age groups benefitted greatly from falling mortgage interest payments as the Bank of England cut interest rates during the recession, older people not only failed to benefit from this but also saw a greater proportion of their income going on food and energy bills.

Compared  with September 2007, the cost of living as measured by RPI has risen for 50-64 year olds by 20.8 per cent, 65-74 year olds by 23.7 per cent and those aged 75 and over by 24.4 per cent. In contrast, RPI for the whole population has increased by 18.2 per cent.

So what has gone up?

The AA has warned that fuel prices are spiralling so high that drivers “can’t take any more”. The motoring organisation said the average cost of petrol has risen 6.24p a litre since early January, adding £3.12 to the cost of filling up a typical tank.

The Food Statistics Pocketbook, published by Defra, showed that the price of food has risen by one third since the financial crisis began in 2007, causing shoppers on lower incomes to settle for lower quality and less healthy food. But Mark Price, managing director of Waitrose, warned last month that things are set to get worse: he says that British shoppers should brace themselves for “massive” food price increases as unfeasibly wet weather last year lead to failed crops and increased commodity prices.

Childcare costs have risen by 5.8% for a child under the age of two in a nursery and by 3.9 per cent for those over two during 2012, according to the charity Daycaretrust.   Average childcare costs now exceed £100 for a 25-hour, part-time place   in many parts of Britain and the average yearly expenditure for a child  under two stands at £5,103, while the most expensive nursery surveyed  charged £300 for 25 hours of care – £15,000 for a year’s childcare. Childminder charges have also risen by more than the rate of inflation –  by 3.2% for a child under two and 3.9% for those aged two or more.

Has anything gone down?

Mortgage rates have tumbled since introduction in August 2012 of Funding for Lending , a government scheme to provide cheap money to banks on the basis that they lend it on to mortgage borrowers and small businesses. Mortgage rates have tumbled in the last few weeks to the lowest levels for 24 years according to the financial product data provider Moneyfacts, even for first time buyers with small deposits.

The average two year fixed rate loan is 4.11 per cent in February 2013, while a five year fixed rate costs 4.14 per cent. “To put the current rates into context, if you had opted for a two year fixed in June 1989, you would have paid an average rate of 12.83 per cent (the least competitive rate was a breath stopping 13.20 per cent).  A five year fixed rate averaged out at 12.85 per cent,” says Sylvia Waycot, editor at Moneyfacts.

Unfortunately the Funding for Lending scheme means that banks are not so reliant on raising money from depositors: they have slashed interest rates on savings accounts, making life  very difficult for those who depend on savings interest to supplement their income. The rate on the average one year fixed rate bond is 1.81 per cent while the average no notice account pays just 0.81%, according to Moneyfacts.

No wonder that research by ING shows that although savages levels recovered in the first half of 2012, savings dropped in the autumn and winter. Whereas the average man or woman had accessible savings worth £2,020 in 2009, the average savings balance has now dropped to £1,678.

Around 1.2 million families have also seen a reduction in or complete loss of their entitlement to child benefit since January, when the government implemented income caps preventing the UK’s wealthiest families from receiving the benefit.

The benefit is tapered once a household’s income reaches £50,000 , and is eradicated once they earn £60,000. Child benefit is paid at the rate of £20.30 a week for the first child, and then £13.40 a week for each child after that. Its loss means income reduction of £1,752 a year for a family with two children.

9 thoughts on “Energy prices to soar but it’s not the only pressure on the cost of living”

  1. Rods says:

    Hi shaun,

    An excellent blog, hitting the parts that the MSM never consider or report.

    Funny old asymmetric world we live in where above target inflation is a temporary 3 year blip and therefore not significant and the merest hint of disinflation has politicians worrying. With China heading for a heavy landing and with much overcapacity are we going to see the dumping of goods adding to price drops?

    It is also strange to me with inflation measures, where occasional purchases like electronic goods are core items and essentials like food are not and the price of property does not even get into the measure. I’m also not convinced that with ever improving specifications for electronic goods that this should change value for money where the old versions are no longer available. Politicians seem to like scarce and expensive essentials like food (CAP makes it more expensive), Water (EU directives on quality, monopolies and a weak regulator meaning above inflation price rises year after year), energy (taxes and green levies and subsidies to expensive unreliable ways of producing it) and shelter (restrictive planning system and local authority development levies) and then wonder why and blame consumers for not consuming discretionary items at the necessary rate to hit their heavily massaged GDP (to flatter) growth targets!

    Tesco seems to be the worst of the supermarkets for sly unit price rises and then big headlines like reducing the price of 4 pints of milk to the same as it has been at Aldi and Lidl for several years. I don’t think they even fool some of the customers some of the time these days, which is why they are struggling. In September I bought several boxes of 30 Shredded Wheat in Tesco, when I went back at the beginning of December the price had gone up by 60p a box. The good news is that Aldi now sell boxes of 24 with the price per biscuit much cheaper, one less thing I now buy in my very occasional Tesco shopping trips. With Aldi and Lidl being considerably cheaper than Tesco, with as good or better quality, they look like they are more efficiently run, have better marketing, much better stock control (Tesco have forgotten how to stack them high and how to sell them cheap) and IMO give a much better shopping experience is Tesco going to become the British Leyland of UK supermarkets compared to German BMWs and Mercedes?

    1. Anonymous says:

      Hi Rods

      My Tesco experience is that Tesco started to head downwards quite soon after Terry Leahy departed. It was quite remarkable for example how good bread which helpful people cut turned into not so good bread (often undercooked I think..) with no staff around. I noted wryly at the time the praise the media “experts” gave the new board. I too shop there less but it is not only a price thing many of the products I liked have changed on gone.

      As to the inflation issue I fear that water is about to become a scarce resource and see ever higher prices. For now with all the rain in the UK recently they are pegged back but around the world it will become an issue. As essentials get ever more expensive we are reminded again of real wages about which we get an update tomorrow.

  2. GusBmth says:

    Hi Shaun

    Thanks for another great article.

    I guess the accuracy of any measure of inflation depends critically on the basket of items included and their weightings. In a society which has become more unequal, choosing a representative basket becomes even more problematical, as groups on different incomes levels have very divergent spending patterns and will experience quite different levels of inflation.

    I searched on the IFS website to find some numbers for differing inflation rates for households on different income levels, but couldn’t find much on the 2009-14 period. Do you know if they or other organisations publish such data?

    I recently found myself shaking my head at the radio, when the ‘inflation beating’ increase in the minimum wage was announced – not for people on minimum wage, it wasn’t!

    As an aside, I’ve noticed the packaging of fruit and veg at my local Tesco for ‘just £1’ – sometimes these deals represent a genuine discount, but some of them are an absolute rip-off. For example, 850 grams of bananas for £1, versus loose ones at 68p a kilo! Such games undermine customer trust, which once lost, is very hard to regain.

    Gus

    1. dutch says:

      Excellent point,well made.I was thinking this earlier in cruder terms.Food/fuel inflation has a disproportionate effect on low wage earners and less so on those higher up the pay scale.

    2. Anonymous says:

      Hi Gus

      Isn’t packaged fruit and veg virtually always like that? As to the inflation numbers the only one which the ONS publishes is the RPI pensioners index which is table 56-9 on the monthly data set. From time to time they do mention this sort of thing in monthly updates and I will try to remember that you asked if I see the numbers. I am afraid that since the “improvements” searching the ONS website is likely to be fruitless…

  3. Anonymous says:

    Still what expertise does it take to say “I agree with Mark (Carney)?”

    And of course Mark Carney listens rather carefully to G Osborne. It’s all politics in the end.

  4. Anonymous says:

    Great column, Shaun. You are really an economist every waking hour, aren’t you, even when shopping for razor blades. The issue you raise of a 200% increase in the price of a razor cartridge would affect the UK CPI and RPI, since razor cartridges are priced items in both. You say that there is no basis for comparison between the old package of eight cartridges and the replacement package of four improved cartridges, at least in the outlet you shop. In other outlets they might have both on sale, but a direct price comparison to determine the quality improvement might be unreliable if the old package was being sold at a discount price to clear out stock.

    An industry representative might be able to provide production cost comparisons for the old and new cartridges, which would seem to be the fairest way of making a quality adjustment under the circumstances. Your list of the items the ONS has hedonic quality adjustments for is very interesting. The US Bureau of Labor Statistics’ list would be quite a bit longer; they use hedonics for a lot of clothing items. However, no statistical agency is going to use hedonics to quality adjust razor blade prices any time soon. Andrew Baldwin

  5. dutch says:

    ‘The Great Octo will stuck its tenticles into anything that smells of money

    About time it was broken up like Standard oil was’

    It’d be a nice appetiser to unwinding the reach of the CB’s

  6. Anonymous says:

    Hi Forbin

    In many ways it is a bit like an alien take over as ex Goldman Sachs and now IMF alumni move into official positions. Whilst I welcome the appointment of a woman there are British women with knowledge of the UK monetary system who would have a much better claim to run our QE exit.

    There was plenty of lauding of the appointment of Nemat Shafik but when I asked Sony Kapoor for example what she knows about UK policy answer came there none. Perhaps the most bizarre effort came from Danny Blanchflower who admitted to not knowing her on twitter “dont know who Shafik is” then shortly afterwards joined the chorus of praise!

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