Ep75 – Female Financial Independence Series: How long is the cost of living crisis going to last

We have with us Manika Premsingh who is an economist and markets commentator with experience covering not emerging and developed markets. She will share her knowledge with us about what is going on in the economy at the moment so we can understand how long it is going to last and why we’re here. She has a master’s in economics and a BA in economics, and  studied at the Indian School of Business. She had worked nearly for four years as a writer and investment writer for The Motley Fool and she has worked for multiple clients, as a public speaker and an economist and sector analyst, and currently an investment content specialist for circa 5000.

The cost of living crisis is associated with inflation. The point to remember is that there is always some inflation in the economy. And that is a good reason, because a small price increase means that more companies will want to produce goods and services, more people can get employed, there is more incentive to produce essentially, and keep the economy growing. The problem arises when inflation rises so fast that people are not able to afford even the basic goods and services. If the prices are rising, then that means people have to cut down on their expenses in other areas of their lives to get by.

Energy prices have risen significantly, because oil prices have been on the rise this year even after the pandemic, when the lockdowns were over, oil prices are still increasing and one of the reasons is that OPEC, which is oil exporting countries organization, has its production remained below pre-pandemic levels. After the lockdown, they were not expecting demand to increase as much as it did. And the supply was not as much so prices increased.

This means that oil prices are actually a cost for many companies. Since companies have costs incurred, they then start to charge higher on the margin to cover for that. This is an additional cost element. So it gets squeezed from both ends. Costs are higher therefore revenues are potentially either growing lesser, or they are actually lesser because people are having challenges to afford.

What drives price increases? That is typically just a difference between supply and demand and this is impacted by the supply chain challenges. Between energy and food, we have seen a serious rise in inflation, because it will mean blocks on the supply side.

From January to March 2022 period, they show a 0.7% increase in growth in the UK economy, which actually does not sound all that bad. But what we have when we look at the more granular monthly data, is that for the last couple of months, the economy is measured by the GDP which is the income generated by everybody who’s participating in the economy.

So when GDP starts falling, that means, we are earning less than we were doing before. And if that happens for two quarters in a row, then we are officially in a recession. we could get into a very dangerous situation, which is called stagflation. This means we can see a period of high inflation and low growth.

The good news is that we are not quite there yet. We still have a lot of work. Past history, or even periods that have seen high inflation and very low growth, we have always come out of those periods. So looking at the Bank of England’s own forecasts, in another couple of years, inflation will be back at 2%. Next year, it’s already going to be at half of where it is now. Next year, we could be looking at a far more improved economic situation.

How long is this cost of living crisis going to last? Pandemic had such a ripple effect and we are actually still facing the aftermath of the pandemic formula. But if we look at how much prices have increased from April, we are actually seeing that the level of price increase has fallen which could mean that some of the measures that have been put in place to bring prices down, are working. GDP numbers show that the economies are still growing. On the other hand, interest rates have to rise so that the government can continue to support families who are struggling with high energy bills.

Stock market investing activity increased significantly and that was because people were saving more than ever. UK households saved the most they have in history, at least as a percentage of their incomes. And where does all the savings go? It goes into investments. Stock markets are driven by institutional investors significantly, and they might still be healthy even if the economy is not in a healthy place.

Ultimately, we want to share our knowledge so that more people can get informed because for anybody, regardless of what their financial situation is, especially for those that are struggling, if you don’t understand what’s actually going on around us and you’re listening to people that maybe were alive in the recession, you have to know that their experience is not exactly the same as what’s happening now.

We’ve evolved as a society and things have changed. Our situation is not at the normal economical shift that happens every 10 to 20 years. This is off the ripple effects off the back of the pandemic, and a couple of other things that have hit it at the same time. The government has got a very tricky job right now to balance that and keep us on track.We have to keep moving in the right direction as far as the pandemic is concerned. Otherwise, we could fall back into difficult territory. There are always risks, but there is always room to feel hopeful.

The views expressed on this podcast and discussed on the blog are in Manika Premsingh’s personal capacity.

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