Is a new cost of living crisis about to hit Britain?

Dan Coatsworth (0:08)

Hello, welcome to the AJ Bell Money & Markets podcast. I'm Dan Coatsworth, and joining me today is Sarah Coles. Hi there, Sarah.

Sarah Coles (0:15)

Hi, Dan. So I think we should probably warn listeners up front that after, remember last year, we discussed the end of the world. Well, we've actually got another catastrophic topic this week, because we're going to be exploring whether we're facing another cost of living crisis.

And that's because people and businesses are under pressure from higher inflation, higher oil prices, the threat of higher interest rates and tax threats, because of course, budget speculation season has kicked off as well.

Dan Coatsworth (0:39)

Yeah, I should say that actually, at the start of this week, it's been a little bit more positive for markets. We're recording this on Wednesday, but as we speak, oil prices are easing slightly. So we'll have a chat about where we are with things like that, and obviously the impact on interest rates and obviously expectations, and kind of what all this means for the cost of living.

Sarah Coles (0:58)

Yeah, so we're also going to drill down into a couple of sectors on this. So we'll look at the impact on sports-related businesses, and also on how supermarkets are kind of fighting for market share in this environment.

Dan Coatsworth (1:09)

We're also going to hear from Rob Abraham from Supermarket Income REIT, an investment company on the UK stock market. He's actually Tesco's biggest landlord.

Sarah Coles (1:18)

Now, we've seen the start of budget speculation season as well, so we're going to look at some of rumors around property and various taxes and what they might mean for you. We've also got the results of our survey into people's biggest budget worries, and we've got the latest tax statistics, which are actually quite revealing.

Dan Coatsworth (1:34)

Finally, we've been digging into some ISA stats and we've discovered a trend that can actually be risky for your family finances.

Sarah Coles (1:41)

There's loads to get stuck into, but we're going to kick off first with the big question.

Whether there is a new cost of living crisis brewing? So Dan, give us the outline here.

Dan Coatsworth (1:52)

Sarah, you're right to ask that question, because there are signs pointing towards significant pressures on consumers. And I think to be able to answer that question, it's worth trying to understand what's actually needed to cause a new cost of living crisis. So the answer is fundamentally a combination of higher energy cost, sticky inflation, rising borrowing costs and weak wage growth.

The danger is not necessarily that inflation returns to double digit levels we saw in 2022, but actually that household incomes start falling behind essential spending again. Now, recent data does point to some pressure from energy and fuel prices, and inflation does remain above the Bank of England's 2% target. So there are also some worrying signs. But if you want one measure to watch, it's real wage growth. And that's pay growth minus inflation. Now, if wages are growing faster than inflation, most households can absorb higher bills. But if inflation starts to rise while wage growth slows, conditions for a new cost of living crisis fall into place. Now, like I say, there are some warning signs. But I'm not sure there's enough evidence yet to say we are definitely, categorically heading towards a repeat of the 2022-23 cost of living crisis. But I thought I'd ask AI to see what AI, well, you know, I suppose we can call it the collective AI, what they said. And they said, well, my assessment, this is AI speaking, be that the risk has risen from low to moderate over the last couple of months, largely because of renewed energy market pressures and concerns that inflation could prove stickier than expected. So I guess with all that in mind, Sarah, should we sort of break down and go through some of these key things one by one?

Sarah Coles (3:32)

Yes, so rather than just leaving it up to the robots to decide. So there are several key data points that really bear in mind when you're looking at this. So the first one is inflation. So that's the headline measure of price growth. That's CPI, which stands for Consumer Prices Index. So if that starts accelerating again, it suggests that the everyday costs of things like, you know, all the goods and services we buy is rising faster. Now, if you get persistent inflation above 3%, that's going to make the bank of England a bit more cautious about cutting rates. Now, we did discuss inflation last week, so I won't go into too much detail, except to say that at the moment inflation is 3.1%, which as you say, is not terribly high. But there are a couple of things about it that are notable. The first is the direction of travel.