Written in collaboration with Starling Bank
What is the ‘cost of living crisis’?
Cost of living is the average amount of money people need to cover basic things, like food, housing and clothing. It’s normal for prices to rise each year, this is called ‘inflation,’ but usually people’s wages go up at a similar rate to the things they’re buying.
At the moment, there’s a cost of living ‘crisis,’ which means prices are rising much faster than wages, particularly for food and energy. This means many people are struggling to pay for everything they need. The cost of living crisis is affecting most of the world, not just the UK.
Why are costs going up so quickly?
Following the Covid-19 lockdowns, there’s been an increase in demand for energy and raw materials like wood and metal. However, the companies supplying these things have struggled to meet demand due to supply chain (the systems that move goods from one place to another) problems.
Another issue that led to increased prices is the ongoing war between Russia and Ukraine. The supply of fuel, such as gas and oil, and other products from these countries like wheat and sunflower oil, is affected by the ongoing war between Russia and Ukraine. When something is in short supply and there’s high demand, it leads to price rises. Experts say the UK leaving the European Union in 2020 has also contributed to this.
In October 2022, the Government set a maximum amount that suppliers can charge for a unit of energy, to stop bills from rising so quickly. The government also introduced cost of living support payments for those on very low incomes, who are the most affected by rising costs.
How is it connected to the interest rate?
One of the things that can help to bring inflation down is raising the interest rate. For savers (people saving money), interest is the money that a bank pays the saver for storing their money with them. For borrowers (those borrowing money), it’s the fee they pay on top of the money they borrow. So, a higher interest rate means people are encouraged to save rather than spend, which should reduce the demand for goods and slow inflation down. In the hope of reducing inflation, the UK’s central bank, The Bank of England, has raised the interest rate nine times since December 2021! However, Rising interest rates mean mortgage (a type of loan that’s used to buy property like a house or flat) costs have become much higher for many people.
Starling Kite Card
Lots of people will be looking for ways to save money and reduce energy costs this year.
Here are some things that could help:
- Make a list of activities that are free or cost very little, like a bike ride, a family games night, or a trip to the park.
- Save energy by switching off or unplugging electrical items when you’re not using them, like games consoles and lamps.
- Turn off the tap while you’re cleaning your teeth to save water and energy.
- Try putting on an extra layer before asking for the heating to be turned up.
- Have a sort out of your clothes and old toys. Perhaps your adult could help you to sell anything you don’t need? You could also donate second-hand items to charity, which is a good way to help others who may be struggling.