How are energy costs contributing to cost-of-living crisis and what lies ahead?

The increase in energy bills is set to heap misery upon households already struggling with soaring inflation.

A hike to the energy price cap has been announced (PA)
A hike to the energy price cap has been announced (PA)

The cost of living in the UK is already rising at its fastest pace for almost 30 years but the worst is yet to come with the now-confirmed 54% – or £693 – hike to the energy price cap and the National Insurance increase on the horizon.

What is contributing to the crisis, where are the price hikes being felt the most and what can we expect over the next few months?

– How much are energy bills rising by in April?

Ofgem has announced that its price cap will increase from April 1 for approximately 22 million customers. Those on default tariffs paying by direct debit will see an increase of £693 from £1,277 to £1,970 per year, while prepayment customers will see an increase of £708 from £1,309 to £2,017.

There are widespread warnings that this will cause some households to choose between heating and eating.

– Why is everything more expensive?

Covid-19 has hit global supply chains with a combination of pent-up demand and delays to shipping as factories across the world face lockdowns and worker absences.

(PA Graphics)

This has led to prices rising, particularly for raw materials.

Food prices have also risen as wages increase, including for HGV drivers due to recent shortages and with thousands of drivers leaving the UK to return to their home countries in the EU.

All of this is adding to eye-watering rises in energy bills after wholesale gas prices shot up by about 500% in 2021, as well as record costs at the petrol pumps from hikes in oil prices globally.

– Will inflation remain high?

Consumer Prices Index (CPI) inflation is currently running at 5.4% as of December, according to the Office for National Statistics (ONS).

The Bank of England has warned that it expects CPI inflation to peak at 7.25% in April, following the increase to energy prices, before falling back.

It is hoped that inflation will start to fall back in the second half of 2022, though it may not be until next year that CPI gets back to the bank’s 2% target.

– What other costs can I expect to increase this year?

The Resolution Foundation recently said each household can expect outgoings to increase by £1,200 this year.

Along with rising energy bills, there is also a one-year 1.25% National Insurance rate rise due in April to help pay for social care and NHS funding.

This comes as wages are already failing to keep up with rises in the cost of living, with average weekly earnings after taking account of inflation falling for the first time in more than a year.

The latest inflation figures have shown that food retailers are also starting to pass on higher costs to consumers, with inflation firmly hitting the supermarket shelves.

– Where are food price rises being felt the most?

The ONS said food inflation reached 4.5% year-on-year in December and was 1.4% since November alone.

Egg prices have risen (PA)

The biggest rises were seen for bread and cereals, as well as oil and fats and meat.

Retail Prices Index data reveals the price of lamb shot up by 5.7% over the month while staples such as fresh milk jumped 3%, bread was 2% higher and eggs lifted 1%.

In the fruit and vegetable aisles, some of the steepest price rises were for potatoes, up 2.1%, with processed veg seeing a 5.1% hike.

– What is being done to help households?

A Government spokeswoman said: “We recognise people are facing pressures with the cost of living, which is why we are providing support worth around £12 billion this financial year and next.

“We will provide an update in due course on further help for households across the UK to meet their energy costs in the face of rising global gas prices.”

Chancellor Rishu Sunak said the Government will help people with the rising cost of energy in the same way it “stood behind the British people through the pandemic”.

Following Ofgem’s price cap rise announcement, he said every British household will receive an upfront £200 discount on their energy bill in October and four in five households will be covered by a further £3.5 billion of relief provided by £150 council tax rebates for bands A to D.

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