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UK Energy crisis: LBC's Dean Dunham breaks down how it will affect you
22 September 2021, 17:51 | Updated: 23 September 2021, 10:13
LBC's consumer expert Dean Dunham breaks down how the current energy crisis will impact you.
The last few days has seen widespread reports of an energy crisis facing the UK, with the increase in wholesale gas prices causing small suppliers to either go bust, or be in need of a bailout. The outcome of this increase ultimately means big increases in energy bills for consumers.
However, this is only part of the problem which has been brewing throughout the pandemic as we all face a cost-of-living crisis which, alongside soaring energy bills, will also inevitably see rising inflation and increased prices for foods, travel, fuel, childcare and other common goods and services needed by most families.
To top off the perfect storm, Government's proposed 1.25 percent hike on National Insurance payments, and pending cut to the £20 Universal Credit uplift makes matters even worse for many families who could see their outgoings increase by as much as £1000 per year.
So what does this mean for your family, and what steps can you take to safely navigate through what many are saying will be the winter of discontent? Here are the key things you need to know:
What is inflation?
Inflation is the rate at which prices are rising (for both goods and services). For example if the cost of a pack of butter is £1 and it rises by 5p, then the level of inflation in this case is 5%. The Office for National Statistics (ONS) studies the prices of thousands of everyday items, from train tickets to televisions. This is what is known as the "basket of goods", and it is being constantly updated. This year the ONS added hand sanitiser, smart watches, and exercise equipment to its list as many people's spending habits changed after lockdown. More weight is given to things we spend more money on. By way of example, if the price of petrol rises by 1p, that will have a bigger impact on the headline inflation rate than, say, 1p on a book of second-class stamps.
Your food shopping
The ONS reported that the price of food and drink in shops and supermarkets rose by 1.1 percent in the month of August.
The reported shortages of some food stuffs, supply chain issues caused by the shortage of haulage drivers, and the increase in energy costs will inevitably result in further rises in food, drink, and everyday grocery costs. An average family of four is likely to see an increase of circa £1.23 per week to their shopping bill*.
The good news is that this is a very competitive space, with the supermarkets battling to be the cheapest and offering the best value. Historically, consumers were creatures of habit and shopped with the same brand each month. My advice is to break this habit and to shop around for the best deals.
Your energy bills
Energy bills are set to increase by between 12 – 43% for most from 1 October. According to the energy regulator, Ofgem, the average dual fuel variable tariff as of April 2021 is £95 per month, or £1,138 a year.
Consumers could therefore have to find an additional £40.85 per month (£489.34 per year) for their energy consumption. My advice is if you are not already on a "standard variable tariff", moving to this with your current supplier may save you money.
This tariff is protected by Ofgem’s price cap and many of the price comparison sites say there are very few tariffs cheaper than the cap. Alternatively, you could find the cheapest one or two-year fixed deal. This should help shield you against price inflation over the coming months.
Your mortgage or rent
The Bank of England aims to keep inflation at 2%. The National Institute of Economic and Social Research group has reported that inflation could hit 3.9 percent early next year – almost double the Bank of England's target.
The main tool at its disposal to keep control of this is interest rates – if inflation rises too steeply, an increase in interest rates tends to be used to counter this. Whilst no increase has been publicly mooted at present, my view is that an increase is inevitable within the next six months.
If you have a variable or tracker mortgage, where anything you pay is directly linked to the base rate, any interest rate rises will mean your mortgage payments will increase. To put this into perspective, even if the rate increases by as little as 0.25 percent, your repayments could still shoot up by hundreds of pounds a year.
However, if you have a fixed rate mortgage, any inflation changes will not impact your payments. If you are not already on a fixed deal, my advice is that it is now time to shop around. At present, competition between lenders is very high and there are still good deals available, including deals with the interest rate under one percent for two and five-year fixed terms.
This would fix your monthly payment and give you more certainty as to your monthly outgoings. However, you need to act fast because if interest rates are increased, these deals with almost certainly be withdrawn from the market.
Other goods and services
It is likely that we will see cost increases for most other goods and services as well, especially if inflation continues to rise, or interest rates are increased. Again, this means shopping around for the best deal.
*£1.23 increase is based on average weekly spending figures of £125 (blog.ovalmoney.com) and £99 (nimblefins.co.uk). ONS reported increase of 1.1% then applied to average weekly spend of £112.