• last year
Your food bill is soaring, rent is through the roof and energy prices are out of control. It’s the cost of living crisis.

The Bank of England pushed interest rates from 4.5% to 5% in June, with the aim of damping down inflation and bringing prices back in line.

But is it working, how long will the crisis last, and when will our food bills get smaller?

The Independent’s chief business commentator, James Moore, goes Behind the Headlines to tackle the cost of living crisis.

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Transcript
00:00 Your rent's going up. The food in your shopping basket is soaring through the roof.
00:04 Your energy bills are sky high. Everything you want to buy is going higher.
00:09 This is a proper, full-on crisis. So when's it going to end?
00:15 My name is James Moore. I'm Chief Business Commentator for The Independent
00:26 and this is The Cost of Living Crisis. What has caused this sudden, rapid spike in inflation
00:34 which we've just not been used to? Well, it's energy. Energy had actually started to spike
00:40 in price before Putin invaded in Ukraine. But when Putin invaded Ukraine, it was like
00:45 adding petrol to a fire. Energy prices shot up around the world and that put a big driver for
00:52 inflation because everyone uses energy. Everyone needs energy. We need energy to keep our houses
00:58 warm in the winter. Businesses need energy to keep their premises. We don't have enough
01:04 capacity of our own as yet. So energy got the ball rolling. And because energy increased everyone's
01:12 costs, they reacted by putting prices up. But it's not just energy. Food is another big component.
01:20 The war in Ukraine pushed the cost of food up. It squelched the supply of grain. Brexit has added
01:28 costs because we import a lot of food. Before, you could just get a lorry, fill it up with Spanish
01:36 fruit and veg, truck it up, take it on a ferry and it ends up at Tesco. Now you've got checks,
01:43 you've got fees, you've got forms that have to be filled in. This adds to costs. And these are only
01:50 going to get worse. All this is added in to make food very much more expensive. So the last thing
01:57 we need to look at is pay rises and greedflation. The Bank of England has not covered itself in
02:03 glory with what it's been telling people about pay rises because the governor of the Bank of
02:09 England earns close to half a million quid a year. So when someone on that sort of salary starts
02:15 telling people not to seek a pay rise, it doesn't go down very well. The reason they say that is
02:20 because they're afraid of a wage price spiral. And what a wage price spiral is, is when companies
02:26 wage wages so they raise their prices. So inflation goes up, people ask for more wages, companies give
02:33 them more wages, they increase their prices. Inflation goes up, people ask for more wages.
02:38 This is what used to happen in the 70s. There is less evidence for it happening now. And the reason
02:45 is wages just have been undershooting inflation for a long time. We've actually been having real
02:50 terms paid cut, all of us, for quite some considerable time now. The bank may be overplaying
02:56 this one. The second thing that is a factor is what's known as greedflation. Now this is
03:02 altogether more cynical. And greedflation is when companies think, "Oh, people are getting used to
03:07 prices going up. I think now might be a good time to raise my prices so I can squeeze a little bit
03:13 more extra profit out." We do see this happening in some places. And that's what the Bank of
03:19 England's hard medicine is really supposed to put a lid on, this greedflation, as well as also
03:26 limiting companies' room to give us pay rises. Because if their borrowing costs go up, their
03:31 room to give pay rises goes down. And then you have core inflation. And core inflation is the
03:37 underlying inflation in the UK economy. It's everything else. And it's what the Bank of
03:42 England can actually influence. The only way to get inflation down is for the Bank of England
03:50 to push up interest rates. It's been doing that, but it's not been pushing them up enough. The
03:58 Bank of England is going to have to push up interest rates by more than it hoped and by more
04:02 than it would like. But that should eventually start to bring inflation down. And the aiming of
04:08 increasing the cost of credit is to damp down demand. So let's take an example. Your mortgage
04:15 rates go up. You have less discretionary spend. You can't buy as many things as you'd like.
04:22 So that takes demand out of the economy and stops businesses from raising their prices. Because
04:30 you're not going to raise your prices if nobody can afford to buy what you're selling
04:34 and there's no demand for it. That's what the interest rate lever is. And it's very much a blunt
04:42 stick. Historically, this has long been the favoured method for controlling inflation in the
04:49 UK. You can do it with taxes as well. You can put taxes up and you'll take demand out of the economy.
04:56 Or you can cut taxes and you will increase demand in the economy, which will push inflation up.
05:02 We're starting to see inflation fall now, but it's falling too slowly. And core inflation
05:08 isn't falling at all. We should start to see inflation in the 5% range towards the end of
05:16 the year. Rate cuts might be a little bit further off. The predictions now are we might not see one
05:24 until early next year at the earliest. Now, when all is said and done, I never thought I'd find
05:28 myself in the camp of the interest rate hawks. These are the people who say you should go harder
05:34 and faster to crush inflation. I visited a food bank a couple of years ago and looked at some of
05:42 the effects then, let alone now. So I find myself in the camp of someone like Catherine Mann, who
05:49 has been consistently arguing on several occasions for the Bank of England to go harder, faster,
05:56 to nip this problem in the bud. I think we just have to get inflation out. The problem is it's
06:02 a dragon with an awfully thick scaly hide. So it needs a lot of sword thrusts to kill it.
06:10 So what does this all mean for you? I think we're going to be with this for a while.
06:15 This is not going to be a terribly cheerful year. Next year might be better. Here's hoping.

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