The cost-of-living crisis is causing severe harm to the livelihoods, safety and wellbeing of millions of adults and children across western nations. In February, I wrote to the UK’s Chancellor of the Exchequer articulating how the UK had walked into a cost-of-living crisis as a consequence of persistent inaction by the Bank of England’s Monetary Policy Committee and the UK Government to pre-emptively address the causes and effects of inflationary risks. Current inflationary risks have been driven by a perfect storm of economic, monetary, and social undercurrents leading to inflation levels unseen in a generation. Click here to see a copy of this letter.
Following Russia’s invasion of Ukraine, higher levels of supply and price volatility must be anticipated across energy and raw material commodities. This should prompt western governments to pre-emptively prepare targeted actions to financially support vulnerable people most exposed to the effects of higher prices. The most vulnerable people will simply be unable to afford access to basic staples needed to survive day-to-day, from energy to food and healthcare.
A recent survey by The Food Foundation found 59% of UK households are worried higher energy prices will mean they have less money to afford enough food for their family. A separate survey identified the risk of up to 66,000 people in the UK becoming homeless before 2024, with millions of other people becoming “sofa surfers” in the same period. These two statistics alone underscore the stress and difficulty faced by millions of people in the UK to survive on a day-to-day basis. These same difficulties are being felt by millions more across the European Union (EU) and the United States (US), underscored by higher and persistent above-target inflation in these regions also. In January 2022, US inflation hit 7.5% and EU inflation hit 5.8% in February 2022. In January, Ofgem, the UK’s energy regulator, announced a 54% increase in the energy price cap effective from April 2022. Similarly in the EU, energy prices rose by 26% in February alone.
The onset of war between Russia and Ukraine, combined with sanctions by western nations aimed at crippling Russia’s economy, will add significant risk to current inflationary forecasts. For example, on the 3rd March 2022, Brent Crude oil hit $117 a barrel, the highest price since 2008 (just before the Global Financial Crisis). As OPEC nations remain at odds on how to manage the geopolitical impacts caused by Russia’s invasion of Ukraine, oil prices will remain vulnerable to upside risk.
As the full extent of Russia’s invasion of Ukraine becomes clearer, including the impact of western sanctions and strategies to de-risk from Russia (albeit the effect of such strategies could take multiple years to fully materialise[1]), raw minerals and materials supplied by Russia will be subject to higher levels of supply and price volatility in the short to medium term, adding significant strain to an already severe cost-of-living crisis. Whilst Russia has so far restrained from taking retaliatory measures towards the west, such as restricting the supply of gas into the EU, any such actions will further add to volatility levels.
The cost-of-living crisis has resulted in millions of people struggling to survive. The onset of war between Russia and Ukraine cements the likelihood of the cost-of-living crisis getting worse before it gets better. For people living in or close to poverty, it will get even harder to make ends meet.
To avoid a repeat of delayed government actions, western governments must pre-empt how Russia’s invasion of Ukraine will amplify the cost-of-living crisis and prepare to offer additional financial support to vulnerable people. Failing to do so will lead to even more serious harm to the livelihoods and wellbeing of millions of adults and children across the west.
In a recent letter to the UK’s Chancellor, Rishi Sunak, I recommended an independent review be undertaken into the Bank of England’s economic forecasting and monetary policy tools to understand how inflationary risks were persistently misinterpreted and subsequently went unaddressed for so long. To read this letter, click here.
