THE ‘cost of living crisis’ is something that is much talked about. But what is it?

In simple terms, inflation has been rising faster than average wages most months for some time, meaning wages buy less than they used to. But whilst this simple piece of elementary maths is the basis for the cost of living crisis, it does not reveal the whole picture.

Wage indices look at pay before tax. Because the tax-free allowance (the wage you earn before you pay any income tax) has been rising, individuals are nearly £1,000 better off just through tax cuts. One and half million more people are in work than four years ago, boosting household income.

The picture gets more complicated. We can also look at what households would have had to pay had the government stuck with taxation plans of the last government. Fuel bills are a significant cost to many households and had we stuck with the fuel duty escalator, petrol and diesel would be around 12p more expensive per litre. The cost to the government has been around £22 billion just to get rid of this unpopular policy that we inherited, but it was the right thing to do to help households.

And at the very complicated end of the economic argument, economists aren’t too sure what is going on in the economy. Whilst employment has been rising fast, output (what the economy produces) has been rising at a slower rate. Explaining why this is the case – the so called productivity conundrum – has been a popular focus for some (all?) of our brainiest economists.

A recent study argues that this can be explained by more people setting up small businesses. We have far more entrepreneurs than ever before and the tax treatment and statistical analysis is different for them. But the ‘grey’ economy may be far bigger than we thought.

This week, however, we had new figures confirming that inflation is falling. CPI inflation is at just 1.6% so wages are now rising faster than inflation. That is not to say that everyone is better off – it is important that the government looks after those being left behind. But we also learnt that the recovery here is the strongest of all developed nations. Coming out of the Great Recession was never going to be easy to achieve or understand. But the indicators are looking better.

CONTACT YOUR MP

  • Email: mark.garnier.mp@parliament.uk
  • Telephone: 020 7219 7198 or 01562 746771
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