- Written by Darshini David
- BBC News chief economics correspondent
image source, Getty Images
The recent cost of living crisis has forced tough choices for many households facing rising food and energy prices.
Additionally, interest rate increases introduced to address rising prices are causing problems for many mortgage holders, tenants and businesses.
However, recent statistics show that wage increases are now in line with the cost of living, and interest rates have remained unchanged for now.
However, this does not mean that the fate of all of us will rapidly improve.
While many people will be hoping that the current financial strain will end, there are several reasons why some people’s lives could become even worse.
jobs and wages
Efforts for workers to get raises to match their spending have been aided by employers looking to attract and retain employees in the face of skills shortages. But that is changing. More than 200,000 jobs were cut between May and July as rising interest rates put pressure on businesses.
The rise in unemployment has been relatively slow so far, but it is gaining momentum and will likely increase further. There is always a time lag between interest rate changes and your boss’s hiring decision.
Surveys have already shown that the new pay deal has loosened in recent weeks, with the Bank of England saying this means inflation, which measures how prices change over time, will continue to fall. , the Ministry of Finance, and independent economists.
But even the central bank expects inflation to remain above its 2% target next year, meaning prices will continue to rise.
Food is one of the areas with the most stubborn inflation. Shops that cost £60 last year are now more than £70.
Although these price increases should slow, analysts warn that the days of cheap food may never return. Companies may be looking to restore profit margins after they were squeezed by high costs last year.
tax
Even if your pay did keep pace with prices from here, even if you recorded a significant increase, tearing open your payslip might not give you a warm glow.
Enter “Stealth Tax”. The government has chosen not to increase the threshold at which people will start paying income tax at various rates in line with inflation from 2021 onwards. As incomes increase, more than 2 million new income taxpayers have been created since 2021, and 1.3 million people have been brought into the high-income bracket. Income tax bracket at tax rate (40p).
Don’t expect to see tax relief right away. Under the current plan, this measure will continue until 2028, increasing the number of taxpayers and the amount of taxes owed. The Prime Minister said this week that he did not expect any tax cuts in his Autumn Statement in November as he was focused on achieving independent fiscal rules.
The Resolution Foundation, an independent think tank focused on improving living standards, says the typical working-age household will earn 4% less by 2024 than in 2021, given tax changes and price increases. ing. There is a possibility that it will not improve until now. 2025.
Government living allowances are also set to end after the winter, with people on below-average incomes likely to be hit hardest. The group could see after-tax incomes and inflation fall by a further 1% between 2024 and 2025, the think tank claims.
borrowing cost
Rising interest rates have felt like an unrelenting scourge for some, and mortgage holders in particular have become a direct flash point in the fight against inflation.
Around half of homeowners with a mortgage, and an even higher proportion with a mortgage, see their monthly repayments rise, typically by several hundred pounds.
Whether the Bank of England finishes raising interest rates or simply suspends them, more banks could face similar pain.
The Bank of England governor has suggested that interest rates are destined to remain high for some time, and it is financial market expectations of where interest rates will go that will determine the cost of fixed rate mortgage transactions.
About 400,000 borrowers are in fixed-rate deals scheduled to expire by the end of this year, and 1.6 million due next year. Those people will be forced to move to products with much higher interest rates, potentially causing their repayments to skyrocket.
image source, Getty Images
Analysts at Oxford Economics say total debt service in 2024 will typically take up almost four times as much household budgets as in 2021. Although foreclosures are expected to increase, safeguards should keep foreclosures very low compared to past lows.
Therefore, it will take some time for the effects of the last interest rate hike to reach people’s pockets and, by extension, to affect housing prices. Economists predict prices could fall by another 5% in 2024, but high mortgage rates will still make it difficult to jump on the housing ladder.
The difficulties many people, especially young people, face when buying a home are one reason why the proportion of households with a mortgage has actually fallen by more than a third. Those who rent instead are already facing pressure. Rents in London, for example, are rising at the fastest pace since at least 2006, as costs for landlords also rise. If some of these landlords sell, rental vacancies could take a hit.
Another reason for the decline in the proportion of households with mortgages is the increase in households (usually elderly) who own their homes outright. They are also likely to be among those who have amassed large savings during the pandemic and have sheltered themselves from recent shocks. This is one reason why spending on non-essentials has been sustained. However, with interest rates unchanged, savings rates are unlikely to rise further.
With so many people’s budgets expected to remain under pressure, consumer spending, the core of the economy, could take a hit. Many economists are concerned about the growth outlook.
Now that the general election is just around the corner, some voters may be feeling even more nervous. They will look to politicians for answers about how they intend to improve their lot.
What should I do if I can’t pay my debt?
- Partition. Citizens Advice suggests calculating how much you owe to whom, which debts are most urgent and how much you need to pay each month.
- Ask for a payment plan. For example, energy suppliers must give you an opportunity to clear your debt before taking steps to recover your money.