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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