As the United Kingdom grapples with a cost of living crisis, multiple factors converge to create an environment of rising costs for households and businesses alike. This article delves into the root causes of the crisis, examining the roles played by Brexit, the COVID-19 pandemic, and the ongoing conflict in Ukraine. Understanding these drivers is essential for those managing wealth, as it provides insight and strategies for navigating turbulent economic waters.
Brexit has had a profound impact on the UK economy, presenting new trade barriers and disrupting previously seamless supply chains and many of these are still to be implemented eight years after Brexit. Reduced immigration from the EU and increasing complexity in trading goods and services, means that businesses face higher production costs. This often translates directly into higher prices for consumers. For the wealth management community, these changes necessitate a reevaluation of portfolios and strategies, emphasising assets and investments that are more immune This reinforces the need for diversified, resilient asset allocation strategies.
The COVID-19 pandemic served as a catalyst for an array of economic disruptions. Multiple lockdowns halted production and disrupted global supply chains, leading to shortages of essential goods. The scarcity of goods such as medical supplies, semiconductors, and consumer products placed upward pressure on prices. Reflecting on these dynamics, wealth managers were advising clients to invest in sectors less susceptible to pandemic-related disruptions, such as technology and healthcare, both of which boomed post COVID.
The war in Ukraine has further exacerbated inflationary trends, particularly in the realms of food and energy. Both Russia and Ukraine are critical global suppliers of wheat, fertilisers, and oil. Russia was the major supplier of gas to Europe. The conflict has resulted in sanctions which constrained supply, pushing prices upward. Combined with Brexit and pandemic-related issues, the UK’s reliance on imported goods becomes even more apparent. Prudent investing actions might include hedging against energy price spikes and exploring investment opportunities in both existing domestic and new renewable energy sectors.
The UK’s energy market, regulated by OFGEM who imposed price caps to reduce price volatility, but often the unintended consequence was that prices remained higher for longer as they were divorced from real market prices. As energy prices rise, so does the cost of living as energy is a significant proportion of both business and consumer spending. Prices dropped over the summer months but are set to rise again this winter so a fixed price deal from your supplier may be a better option than relying on the price cap.The new Labour government is promising fresh investment in the renewable energy sector particularly wind power and modular nuclear sites but it is unclear how existing energy companies may benefit.
Staples such as bread, milk, and meat have seen double-digit price increases, placing additional strain on household budgets. The UK’s dependency on imported food makes it susceptible to global market fluctuations. In light of this, our portfolio managers are reviewing investments in agricultural commodities and companies implementing innovative food technologies. Such diversification can act as a hedge against food price volatility.
In an effort to control inflation, the Bank of England raised interest rates. While this move aimed to stabilise prices, it also increased borrowing costs. Higher interest rates can affect mortgages, loans, and credit, presenting a challenge for both individuals and businesses. Wealth management strategies should thus encompass advice on debt management, refinancing options, and interest rate-sensitive investments.
To combat the crisis, the former UK government introduced a £9.1 billion package aimed at supporting households with energy bills and has implemented a 1% cut in National Insurance contributions. These measures provided short-term relief, but the new Labour government has withdrawn the £300 winter fuel payments from all but the most needy. The budget on 30 October will provide greater clarity on where else the government may cut spending or raise taxation to stabilise the public finances which are running at a considerable deficit currently.
Other targeted support measures included increasing the National Living Wage and offering specific financial assistance to vulnerable households. While these measures may not solve the crisis overnight, they represent significant steps towards providing some relief to those most affected. The level and type of support will inevitably change now that a new Labour administration is in power.
The current cost of living crisis in the UK is driven by a perfect storm of global and domestic factors, ranging from the lingering effects of the COVID-19 pandemic to geopolitical tensions and domestic economic policies. As your trusted partner in wealth management, we are committed to guiding you through these challenging times with expert advice and bespoke financial strategies.
For individuals and families seeking to manage their wealth effectively, strategic planning is crucial. Consulting with a trusted wealth management adviser who can offer you guidance on optimising your financial strategies to better navigate through the complexities of the current economic landscape, is certainly a viable option not to be overlooked.
Our expertise in wealth management enables us to provide you with tailored advice and proactive solutions to help safeguard and grow your wealth, even amid economic uncertainty. By leveraging our in-depth understanding of both global and domestic economic forces, we aim to help you make informed decisions that align with your financial goals.
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