Surging energy prices push inflation up to highest level since March

Sarah Coles, head of personal finance at AJ Bell, insists wages are having a big effect.

She said: “Inflation has risen from 2.6 per cent in June to 2.9 per cent in July, which is always going to stretch household budgets thinner.

“Yet at this level, inflation is nothing like as dramatic as it was during the height of the cost-of-living crisis, so you’d be forgiven for wondering why money seems so tight right now.

“It’s partly down to wages, because although wages have risen 3.5 per cent, wages in the private sector are up just 2.8 per cent in a year, so plenty of people are getting progressively worse off with each passing month.

“It also owes something to the cumulative effect of the cost-of-living crisis, which means prices have risen almost 30 per cent over the past five years – although wages have cumulatively risen a similar amount, so it’s not just this.

“A significant part of the problem is the kinds of prices that are rising, and the fact that services inflation is higher than goods inflation. Services inflation includes things like rent, which went from 3.4 per cent in June to 4.1 per cent in July, internet services which were up 12.1 per cent, mobile phone services up nine per cent, car insurance up 8.4 per cent, care home fees up 6.6 per cent, dental services up 5.2 per cent, education up 5.1 per cent, the cost of playing sport up 4.6 per cent and childcare up 4.2 per cent.

“Meanwhile, the price of some goods is falling. The rate of food inflation slowed to 1.3 per cent and within that there were plenty of fallers, including pizza and quiche down 8.5 per cent in a year, butter down 5.3 per cent and jam, marmalade and honey down 5.1 per cent. Meanwhile the price of men’s clothes is down 0.4 per cent, the price of shoes has fallen 1.5 per cent, garden furniture was down 12 per cent and the price of TVs fell 9.1 per cent.

“It’s worth noting that some goods also soared in price over the past 12 months. Gas and electricity are both classed as goods and gas is up eight per cent in a year. Water and sewerage are also goods, and are up 7.3 per cent. These play a similar role in our budgets as services – as essential monthly bills – so they are exacerbating the problem.

“Service industries are often labour intensive and rely on large numbers of staff earning the minimum wage – such as in care homes, hospitality and childcare. It means that as the minimum wage rises, so do costs. This has been exacerbated by rising employers’ National Insurance, so service industries have been passing at least some of these costs on.

“In addition, different service industries face their own pressures. So for example, rents are up in part because mortgage rates have risen and legislation has become more onerous for landlords, which is being passed on to tenants.

“Meanwhile, childcare costs have risen in part because of staffing costs, but also because the roll out of free childcare has increased demand so much, which has put pressure on capacity. Meanwhile, government funding doesn’t cover all the cost of funded places, so paid-for childcare is having to close the gap.

“Essential services can be harder to cut back on than many goods, where in some cases we can simply put off buying them. If the price of clothes or electrical goods spikes, we can make do with what we have. The same isn’t true for essentials like public transport, rent, childcare and retirement homes.

“We face some of these costs every month, including things like broadband and mobile phone bills, so we feel the pain of services inflation on a monthly basis.

“Services inflation is often stickier than goods inflation too. Food prices will rise and fall with supply. Meanwhile clothes get discounted as seasons pass and tech gets cheaper once it’s no longer the hottest new gadget. However, once rent rises or the cost of care increases, it rarely falls.

“Not all services are absolute essentials, but some of the nice-to-haves can be tough to cut because this spending involves emotions. It can be difficult to tell the family they can’t go on holiday next year, or that they can’t afford their hobbies.

“It’s also difficult to travel less to see family and friends or cancel days out without emotional fall out. People might feel guilty when they spend more on these things, but they also feel guilty when they don’t.”