Monday 8 August 2022

The cost of living crisis

The cost of living crisis

Inflation has hit us. The consumer price index was 9.4% highr in June 2022 than a year ago. And there are lots of arguments about the cause - the Ukraine war has affected gas and oil prices, food costs more, we're seeing the delayed effect of the Covid crisis. Lots of explanations are being thrown around, but everyone seems to agree on one thing - the government must Do Something.

And so Some Things are being Done. None of them are effective.

There's a price cap on energy; specifically gas and electricity. In our house, we use very little gas - almost none, because our heating is done with a heat pump, which is driven by electricity. Also, we aren't on the "default tariff" - I had a big haggle with our vendors EDF to get the best price.

The price cap came in, in 2019. People thought it was a great idea, but experience tells us that it isn't as simple as that.

For any resource that isn't unlimited (economists call these scarce resources) there has to be a way to allocate them between buyers. The usual mechanism is price; a higher price causes a lower demand and (after a lag) a higher supply. And vice versa. If you try to control the price, and make it lower than it would be (a price cap) then demand is higher than it would be, and supply is lower.

The other mechanism is rationing. You tell people how much they can have. That worked in WW2 with food rationing, because it's possible to calculate how much food each person needs (about 2000 calories/day for women, 2500 for men). But how do you do it with electricity? How much electricity do you need? How do you ration electricity?

In April 2022, the price cap rose by 54%. It needed to go up, because global gas prices had gone up. You can tell a vendor "Buy your gas for £100 and sell it for £90) but they won't stay in business for long. A lot of energy vendors went out of business.

In October 2022, the price cap will rise by 70%. You see the problem? If your bill was £1000 last year, it went up to £1540 in April, and will go up to £2600 in October. The April rise was made more palatable by the fact that we don't need much home heating at that time of year, but the October rise will hit the winter of 2022/23.

People will be forced to choose between eating and heating, is the slogan I've heard. It's nonsense, of course. When I was a lad, if it got cold, you put on another sweater. We didn't have central heating - what we did have, is ice on the windows (single glazing) in the cold mornings.

So what can the government do? There's a variety of possibilities, but they all boil down to subsidising the cost of energy. But if you cut VAT on energy, you'll have to raise taxes somewhere else. Or borrow, and "borrow" implies "pay back later". And once you start subsidising the cost of energy, you won't be able to stop, because then that 70% price rise kicks in. The only hope is that energy costs fall in a few years, and I'm not expecting that to happen.

So everyone is telling the government "Do Something" because talk is cheap, and I've not seen anyone in government admit that "there isn't much we can do". They can do a bit of nibbling round the edges, but nothing substantial.

So the government will Do Something. And then act totally surprised when it has no effect.

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