The UK Govt & The Cost of Living

26 May 2022

THE UK COST OF LIVING CRISIS

In response to the cost of living crisis, UK Chancellor Rishi Sunak today officially introduced a windfall tax on energy companies of 25 pct, in an effort to counter the ‘cost of living crisis’.

The tax initiative is a temporary one on oil and gas giants and, the chancellor announced, it will include a new investment allowance ‘to incentivise the reinvestment of profits’.

One-off payments will also be given to the most vulnerable - namely, the elderly; those with disabilities and those on the lowest incomes.

Sunak said approximately eight million of the lowest income households will be sent a one-off payment of £650.

He has also confirmed the previously announced £200 energy bills’ loan will now be recategorised as a grant, increased to £400, and no longer needs to be paid back.

Sunak added that, from the autumn, eight million pensioner households will receive an extra winter fuel payment of £300.



In addition, he said there will be a one-off disability cost of living payment of £150.

 Sunak has described the current situation as "simply unacceptable" and said Government will never allow people to be left destitute.

He said the country will get through the crisis because the government has the tools they need to combat and reduce inflation.

He added the government will turn the current situation into a "springboard of opportunity".

Sunak estimates his cost of living package is worth 15 billion pounds.

Labour’s shadow chancellor, Rachel Reeves, has welcomed Rishi Sunak's announcements, stating they are policies her party has been pushing for months.

"Let there be no doubt about who is winning the battle of ideas in Britain, it is the Labour party," she said.

She added, "Today it feels like the chancellor has finally realised the problems the country [is] facing."

COST OF LIVING OVERVIEW

CAUSE AND EFFECT

Russia is one of the world’s largest producers of oil and gas, producing 4.5 million barrels of oil each day - second only to Saudi Arabia’s rate of production. 

There is obvious potential for significant disruption to supplies due to its conflict with Ukraine. In addition, the much discussed possible postponement by Germany of the Nord Stream 2 gas pipeline may also seriously impact the global energy market: Russia may opt to reduce oil exports to Europe due to economic sanctions, which may leave Saudi in a challenging position, as analysts state it could struggle to increase production in order to meet demand.

Meanwhile, the Financial Times reported, ‘Opec, the oil producers’ cartel, is already struggling to meet its output targets as demand for crude rebounds following the easing of lockdown restrictions. This has pushed up prices, with analysts warning there is limited capacity to increase supplies if flows from Russia are affected by sanctions’. 

Fuel costs have had the biggest impact on the inflation rate, with diesel prices up by 18.8p per litre this year, compared with a rise of 3.5p per litre a year ago, according to ONS (Office of national Statistics) data.

And since late 2021, prices have also risen quickly as pandemic restrictions were eased and firms faced higher energy and shipping costs, which they have subsequently passed on to consumers.

Market analysts state continued high fuel costs will not just be due to the Russia/Ukraine conflict - rather, it should be noted that relatively low barrel prices in recent years have put plans to drill for new reserves on hold. 

This is true in Africa, the US and South America.

Even if exploration projects increase it may well take years for new resources to be available in those rates of volume needed to significantly adjust the market.

DOMESTIC FUEL SUPPLY

UK average pump prices of petrol and diesel hit record highs in the last few days, with petrol costs of 170.35p per litre and diesel averages at 181.35p per litre.

The AA has called the latest price rises a “milestone of misery”. 

The organisation’s spokesman, Luke Bosdet, said, “It is particularly galling when supermarkets of the same brand are charging significantly more at one superstore compared to another not that far away.”

RAC fuel spokesperson Simon Williams said, “while wholesale prices may have peaked for the time being last week, they are still worryingly high - which means there’s no respite from the record-high pump prices which are so relentlessly contributing to the cost-of-living crisis.

He added, “we badly need the government to take more action to ease the burden on drivers… VAT at 20 per cent on fuel is currently benefiting the treasury to the tune of around 30p-a-litre, which seems very unfair when you consider it’s a tax on a tax, as fuel duty – despite being cut to 53p a litre at the end of March – is charged at the wholesale level.”

At the time of writing the chancellor has not commented on any change in policy regarding VAT on fuel. 

Motorway fuel stations have been criticised for their high fuel prices, but argue this is because many of them are open 24 hours a day and offer more services than a regular forecourt. They add that motorway fuel stations also pay high rent prices for the buildings they operate.

However, RAC fuel spokesman Simon Williams argues,“We can see no reason why motorway fuel should be so much more expensive. In fact, arguably, it is much easier from a delivery point of view than it is getting fuel to urban filling stations.”

And despite the AA’s observations, supermarket forecourts have been shown to usually offer the cheapest fuel prices. 

Companies like Asda, Tesco, Sainsbury’s and Morrisons are of course all in competition, which provides the incentive for them to keep fuel prices low.

THE FOOD CRISIS

Meanwhile, UK consumers could be set to face an average food bill increase of £271 this year as prices continue to rise, according to research from data and insights firm Kantar, published at the beginning of May 2022.

Grocery prices were 5.9% higher in April compared to a year ago, which equates to the biggest increase since December 2011, according to the report.

This is on the back of a UK inflation rate rise to 7% in the year to March 2022 - the highest rate since 1992 and up from 6.2% in the 12 months to February 2022.

Inflation currently stands at 9%.

market watchers have stated that an high inflationary environment could lead to discounters capturing share from those consumers downtrading away from the larger super markets, and may face volume squeeze as existing, largely low income households, lose purchasing power and therefore cut their spend.

 CONSUMER REACTION

It seems clear that, as a consequence of these rises and therefore pressure on household budgets, shoppers are turning away from the big-four supermarkets: Tesco (LON: TSCO), Asda (a Wal-Mart Stores’ brand), Morrisons (LON: MRW) and Sainsbury’s (LON: SBRY) - and retreating to discount retailers such as privately owned Aldi and Lidl respectively. 

More than one million additional shoppers visited the two discount retailers over the period, compared with this time last year - with both achieving record-breaking market shares, Kantar reported.

RETAILER PERFORMANCE

Aldi was the fastest growing retailer overall during the period, according to Kantar’s data, with sales increasing by 4.2% over the 12 weeks to 17 April 2022; Lidl was close on its heels with sales up 4%.

However, some analysts state that Aldi’s limited range allows for less short-term precise flexibility. They add that discounters are expected to maintain their 10-15% price gap, further attracting consumer downtrading, with discounters’ cost structures ‘continuing to provide such advantage. 

Tesco emerged as the only one of the big-four to increase its market share, growing 0.3 percentage points to 27.3% of total grocery sales.

This may have been due in part to its ‘Aldi Price Match’ initiative, which has successfully attracted customers; Sainsburys has also initiated a similar strategy. However, Audit Chair at Lidl Great Britain Ltd, Dirk Kahl, does not believe Tesco’s strategy will be sustainable in the long term and will create brand damage. 

Again, supply chain issues also can’t be ignored, in concert with the effect of the Ukraine/Russia conflict and rising raw material costs, which are all contributing to soaring food prices. 

In the UK, the price of oils and fats for food increased by 7.2% in March (ONS), with food prices overall up 5.1%.

The biggest losers to Aldi have been Morrisons and Asda, who both announced on 25 April 2022 that they will be cutting prices on “hundreds of products.”

Morrisons in addition said it will offer an average 13% price cut on more than 500 goods including eggs, beef and rice.

Meanwhile, Asda stated it has "dropped and locked in" prices on some products until the end of the year.

Richard Walker, managing director of the lesser player, Iceland - which has 2.2% of the UK grocery market - also recently stated that the current cost of living is the "single biggest domestic issue" facing the country, and said Iceland will offer a "constant drumbeat" of deals to help shoppers cut costs.