Inflation has been rising for several months and has now reached a 40-year high, climbing to 9.4% in the year to June 2022 (see Figure 1). This is due to irregularities and disruptions in demand and supply, and to increasing energy prices. Demand patterns have been inconsistent as the Covid-19 pandemic waxes and wanes, affecting production and distribution, and disrupting global supply chain availability and costs.

In the UK, Brexit has increased costs and difficulties of obtaining labour and of importing and exporting products. It has also had an indirect impact on exchanges rates, with the pound falling against the dollar substantially since 2016. But it is energy prices (mainly internationally priced in dollars) that are driving current inflation. Increasing wholesale gas and electricity prices are feeding into rising domestic and commercial energy bills. The cost of petrol has almost doubled in the UK since May 2020. These issues predate, but have been exacerbated by, the Russian invasion of Ukraine.

Figure 1: Inflation (June 2012 to June 2022)

Source: Office for National Statistics (ONS), 2022
Note: CPIH – consumer price index including owner occupiers’ housing costs; CPI – consumer price index; OOH – owner occupiers’ housing costs

Consumer costs have been rising for some time. Government increases in tax and national insurance, as well as the removal of pandemic-related universal credit and other benefit increases, have exacerbated the escalation. This situation also comes on the back of a decade of austerity and wage restraint for much of the population, which resulted in stagnant incomes and decreased spending power for many. Further, inflation concerns have resulted in the Bank of England raising its base rate from an all-time low of 0.1% (held between March 2020 and December 2021), through five increases to 1.25% in June 2022, impacting the costs of consumer and business borrowing.

How are consumers being affected?

Everyone is hurt by inflation, but the impacts are not felt evenly across society. Low-income consumers are more adversely affected as they spend a larger proportion of their income on food and energy (see Figure 2). The effects of rising energy, housing and transport costs have a differential and significant impact on lower-income consumers, as do food and other consumer goods prices (see Figure 3). There appear to be spatial implications from this, with the Centre for Cities calculating that inflation rates are higher in northern and poorer cities, due to their demographics, infrastructure and economic makeup.

Inflation has resulted in many (but not only) lower-income households cutting spending and/or switching the products they buy, as well as wider use of food banks and greater reliance on debt for regular spending. The problems facing low-income consumers have been highlighted by the food poverty campaigner Jack Monroe, who focuses on both the increasing prices and low availability of products typically consumed.

Figure 2: Inflation rate by income decile

Source: Institute for Fiscal Studies (IFS), 2022

Figure 3: Household spending on food and energy, 2019-2021

Source: House of Commons Library, 2022

These wider impacts on consumers can also be seen through the Growth from Knowledge (GfK) consumer confidence index. The index – which presents changes in sentiment arising from consumers’ views of their finances and the economy now and in the next 12 months – is now at its lowest level since the series began in 1974, with an exceptionally rapid decline in the last year (see Figure 4). It shows that consumers are experiencing their own financial issues but are also concerned about the general economic situation ahead and how this might affect them.

Figure 4: GfK Consumer Confidence Barometer June 2022

Source: GfK, 2022

This has also been identified in the ‘abdrn Financial Fairness Trust/University of Bristol 6^th Coronavirus Financial Impact Tracker Survey’ (June 2022), which showed the largest decrease in financial wellbeing since the study began. An additional 1.6 million households are estimated to be in ‘serious difficulties’, as well as an increase in those ‘struggling’. These impacts are focused on lower income households and describe a precarious financial existence, with reductions in retail spending, including on food, one consequence.

Consumer confidence in the UK is thus very low despite measures by the government to moderate the impact of household energy bills from spring 2022. An initial Council Tax Rebate of £150 for households in A-D Council Tax Bands has been followed by a package of UK Government assistance payments, to come in between spring and autumn 2022. This covers 8 million low-income households on benefits (£650 per household), 6 million individuals on disability benefits (£150), 8 million pensioner households (£300) and £400 for all households through an energy bill payment. More might be needed in the autumn as energy prices are now predicted to rise even further.

How is the retail sector affected?

The retail sector is beginning to see the impacts of these trends. Food products such as pasta, bread and crisps have seen large price increases, but consumers report rises across the entire product range. A particular recent example is the price of Lurpak and other spreadable butters, leading to reports of an increase in security tagging of food products. They also report cutting back on food purchases, switching to cheaper brand products, shopping more frequently for less, switching to discounters and managing budgets closely, even at the checkout tills.

In non-food markets, people are also postponing spending on large items, such as household and white goods or cars. For retailers this may lead to unsold stock accumulating in the supply chain, especially where orders were placed a while ago. There is also some evidence that clothing companies are being affected by consumers returning items, even those that have already been worn. The British Retail Consortium sales data for July 2022 showed a third consecutive month of falling sales, even before inflation was accounted for.

This slowdown in spending is picked up in official retail sales figures. There has been a fall in retail sales volumes, mainly resulting from a decline in fuel and non-food store spending, according to ONS data for Great Britain for June 2022 (see Figure 5). Online sales have continued to decline as a proportion of retail sales but remain above pre-pandemic levels. June saw food and drink sales rise due to the Queen’s platinum Jubilee, but the broad trend is for declining food sales.

These figures show a steady downward trend in retail sales volumes since summer 2021. Affordability is increasingly affecting purchasing decisions, leading consumers to buy fewer food and household items. As more consumers report difficulties in paying bills and a lack of financial resilience and savings, income to spend on retail goods (including essentials) is further squeezed.

Figure 5: Retail sales volumes (2019-2022)

Source: ONS, 2022

The location and type of shops that people use may also be changing. With high transport costs (especially petrol), local stores may benefit from consumers avoiding costly travel. In contrast, larger car-dependent stores may see a decline in footfall and spending.

Increasing costs may also affect how much online retailers charge for delivery, potentially hurting online sales (although consumer perceptions of delivery costs versus petrol prices remain uncertain).

Concerns about the cost of living have led to workers demanding wage increases and some industrial action. Retailers have had to offer staff pay increases – often linked to the minimum and/or living wage or levels above these – and have faced other difficulties in the labour market, where retail vacancies remain high, and labour is in short supply.

Retailers are also affected by rising operating costs. Businesses’ energy costs are rising and are not capped (unlike for consumers). Similarly, purchasing and transporting or delivering products to stores or to consumers is becoming more expensive. Retailers are also vulnerable to other government and administrative costs such as rates, rent and various levies, which compound the pressures on retailers’ outgoings, even at a time that sales are falling.

What is the outlook for retailers?

The Bank of England and the UK government argue that the current cost of living issues (and especially inflation) are temporary. They are hopeful that pressures will ease in 2023, and that inflation will return to its 2% target by 2024.

But international geopolitical tensions – from pandemic-hit supply chains (particularly in the supply powerhouse of China where covid continues to impact production and distribution) to the war in Ukraine (which is affecting food, energy and fertiliser supplies) – do not show signs of easing. As a result, the prices of various commodities and products are predicted to remain high. Energy prices, for example, have been pushed up by the war and a lack of storage and do not yet seem to have stabilised. This means price pressure on consumers is set to continue in the short term, at least.

Figure 6: Anderson’s ‘Agflation’ and UK consumer price index (2015 to 2023)

Source: The Andersons Centre, 2022
Note: Andersons’ Agflation index builds on Department for Environment, Food and Rural Affairs price indices for agricultural inputs and weights each input cost (for example, animal feed) by the overall spend by UK farmers. Andersons then provides a more up-to-date estimate of the price index for each input cost category.

Product prices also look set to remain high or even increase. The Anderson ‘Agflation’ index – which looks at the price of inputs to farming – stands at over 30% and points to the difficulties that farmers and other producers are having in controlling costs (see Figure 6). These issues will inevitably have a knock-on effect on the prices of food in the coming year. Climate change, including record heat in continental Europe, is likely to hinder food supply further.

This is leading to tensions between retailers and manufacturers. Whilst there are always tough price negotiations in these relationships, disagreements are becoming more common and extreme., leading for example to a Kraft Heinz/Tesco public disagreement and refusal to supply by Kraft Heinz. Tesco said they would not pass on ‘unjustifiable price increases’ while Kraft Heinz said they would ‘not compromise on quality’. Supply tensions across retail sectors continue to simmer as retailers and manufacturers are squeezed in turn by reducing consuming spending and increasing input prices.

For consumers (especially those with lower incomes), the situation and outlook are particularly worrying. This is driving changes in shopping behaviour, affecting retailer performance. If current trends continue, an increasing share of the population will be affected, leading to more widespread effects on the retail sector.

But there will be some winners as well as losers. Retailers focused on value and low prices, perhaps through their own private retail brands, can benefit from the switching underway. Those with a local presence, allowing consumers to avoid costly travel, will also stand to gain. While many consumers and retailers are finding life very difficult, others are relatively unaffected, and some groups clearly have money to spend. Ultimately, how long the current inflationary surge lasts will affect how well, or badly, different parts of the retail sector perform.

In the short term, it is going to be tough for consumers and retailers. Worries about inflation and impact of price rises across the economy are leading to reduced spending and personal hardship. Retailers are experiencing this slowdown and until inflation falls and/or consumers see increases in their disposable income, spending will continue to struggle impacting retailers in turn.

Where can I find out more?

• The Office for National Statistics (ONS) publishes regular updates on their data series and a range of analyses of the trends and directions. They are adding to their standard data series with a range of experimental data sets.
• The House of Commons Library contains a range of reports and briefing papers on topics mentioned in this article.
• A wide range of academics, consultants, NGOs and other formal bodies and pressure groups report regularly on the economic background and implications of many of the issues discussed here. These include the Office for Budgetary Responsibility (OBR), the Institute for Fiscal Studies (IFS), the Institute for Government, the Resolution Foundation, the Institute for Public Policy Research (IPPR) and the Trussell Trust.

Who are experts on this question?

• Lotanna Emediegwu
• Michael McMahon
• Leigh Sparks

Author: Leigh Sparks

Photo by Alexey_Fedoren from iStock

The post How is the cost of living crisis affecting retailers and their customers? appeared first on Economics Observatory.

But what is driving inflation? This update delves into the data underlying our measures of inflation to find out.

Figure 1: Line chart of CPI, 1988-2022

Source: ONS

The recent inflation is striking in just how broad based it is. The ONS breaks down the contributions to inflation by allocating goods and services into high level categories known as ‘divisions’. Across these divisions—food, housing, transport, clothing, furniture—we are seeing price pressure. This is rare. In less inflationary times the typical pattern is for some divisions to be rising, while others are flat or falling. 

The data underlying these findings—so called ‘micro data’—are individual prices collected by the ONS in shops across the country. The dataset is huge (well over 40 million prices have been collected since 1988) and allows us to take a finer look at how and why inflation is surging. For more on the data, see this page.

Delving into the micro data in normal times, we find a lot of price flux. That is, even when inflation is rising, there tend to be some shops that are cutting their prices. In other words, prices tend to ebb and flow, as the pattern of the past ten years (see Figure 2). Recently, though, a striking (and historically unique) anomaly has emerged. The lines tracking the share of prices rising and falling have diverged. There are far fewer price cuts out there. This is another measure of just how widespread the inflation is that we are facing.

Figure 2: Month-on-month price changes

Source: ONS; Davies (2022)

Inflation is an annual concept—the price today compared to 12 months ago. So, the next chart asks the same question over a yearly window. The longer window smooths out some of the monthly flux, and clearly shows periods in which price rises become more common, and inflation rises.

Figure 3: Annual price changes

Source: ONS; Davies (2022)

Another interesting angle is to look at the prices of individual goods and services. Figure 4 does this, focusing on a selection of items which price rises, across the country, were most common. The left-hand panel shows the proportion of prices that rose compared to last year. For some items, all the prices the ONS collected rose—meaning inflation would be completely unavoidable. Annual prices are up for fuels (kerosene); smokers face higher costs with rolling tobacco, cigarettes and cigars all up; ready meals and take away food (fish and chips strongly up) have risen; as have staples like milk, cheese and butter. Those seeking home improvements will be stung by high prices of MDF, kitchen units and paint.

Figure 4: Micro data – main risers

Source: ONS; Davies (2022)

The higher frequency data shows a different story, and one that is increasingly causing concern. Food dominates the list of price risers, with milk, spaghetti, baked beans, salmon fillets, bacon, lettuce, cucumber and eggs all seeing high numbers of price rises. Normally these are exactly the type of items that see a great deal of flux. This means prices being up one month doesn’t necessarily lead to annual inflation, since they could soon drop down again. But as Figure 2 above shows, with price cuts a rarity, the short-term price jumps seen in the micro data may well become locked in.

Where can I find out more?

• The latest ONS data for inflation is available here.
• The latest wages data can be found here.
• More information on the prices micro data is available here.

Who are experts on this question?

• Jagjit Chadha
• Richard Davies
• Huw Dixon
• Michael McMahon

Author: Richard Davies

The post Inflation update: what’s driving the cost of living crisis? appeared first on Economics Observatory.

Dobbs hands the decision of access to abortion back to individual states. The ruling set in motion a series of anti-abortion legislation – known as ‘trigger bans’ – in a number of states across the country. It is estimated that at least 25 states will move to ban abortion as quickly as possible (Guttmacher Institute, 2022).

This is despite the majority of US adults believing that abortion should be legal in all or most circumstances (61%), according to a recent survey (Pew Research Centre, 2022).

Some of these state laws will prohibit abortions, allowing exceptions only in cases where the life of the mother is at risk or if the foetus has a fatal abnormality (New York Times, 2022). Nevertheless, there have already been reports that restrictive laws may delay treatment for pregnancy complications, putting women’s lives in danger (Texas Tribune, 2022).

Figure 1: US abortion policies and access after Roe

Source: Guttmacher Institute, 2022

In submitting the Dobbs case, the state of Mississippi claimed that ‘there is simply no causal link between the availability of abortion and the capacity of women to act in society’, and thus that access to abortion has not affected ‘the ability of women to participate equally in the economic and social life of the Nation’ (Supreme Court of the United States, 2021).

In reality, the ruling will directly affect the lives of millions of women in the United States and will have a profound impact across society. This is backed up by a large body of research evidence on the impact of abortion access, not only on births but also on the economic wellbeing and health of those who are affected.

This research makes use of the fact that abortion access has varied across US states and compares what happened in states that expanded (or restricted) abortion access with what happened in states where abortion access stayed the same.

For example, five states and one district had already revoked their abortion prohibitions many years before the Roe v. Wade ruling (Myers and Welch, 2021). This allowed researchers to compare changes in outcomes related to fertility, education and wellbeing in the ‘repeal’ states at the point at which they removed abortion restrictions to changes in the rest of the country.

The states in which abortion access did not change act as a ‘control’ to account for alternative confounding effects that may have affected fertility and women’s lives at the time of Roe v. Wade. Using this approach, the researchers can be more confident that they have identified the causal effect of abortion access.

The findings from this research provide evidence that there is a causal link between the availability of abortion and the capacity of women to act in society – and gives an insight into what may happen as a result of the Dobbs ruling in states that ban or further restrict access to abortion.

Who is most likely to access abortion?

In 2020, 930,160 abortions took place in the United States (14.4 per 1,000 women), an 8% increase from three years previously. Accompanied by a 6% decline in births, these patterns indicate that fewer people were getting pregnant and among those who did, a greater proportion chose to have an abortion (Guttmacher Institute, 2022).

Of the 6.1 million pregnancies in the United States in 2011, 2.8 million were unintended, which equates to roughly 45%. Of these, 27% were ‘wanted later’ and 18% were ‘unwanted’ for other reasons (Guttmacher Institute, 2019).

Although these figures convey a relatively high demand for abortions across the US population, there are clear demographic disparities in the incidence of unintended pregnancies. Recognising these differences enables informed decision-making by policy-makers and underlines any inequalities that may be present in the context of abortions in the United States.

These inequalities reflect differences in social, economic, ethical, institutional and political landscapes, which in turn affect women’s choices, abortion access and, ultimately, outcomes related to fertility, education and wellbeing (Guttmacher Institute, 2019).

Traditional estimation methods to find the rate of unintended pregnancy among different groups of women factor in all women in the population, irrespective of whether or not they are sexually active.

Using these methods, rates of unintended pregnancy are found to be highest among women aged 20-24 – 81 per 1,000 women. But when women who are sexually inactive are excluded, the age group with the highest rate of unintended pregnancies is 15-19 year-olds (Finer, 2010).

Cohabiting women have a higher rate of unintended pregnancy – at 141 per 1,000 women – compared with unmarried non-cohabiting women – 36-54 per 1,000 women – and married women – 29 per 1,000 women (Finer and Zolna, 2010). In 2016, over half (59%) of women who had abortions already had a child (Guttmacher Institute, 2016).

Non-Hispanic black women are more than twice as likely to have an unintended pregnancy – 79 per 1,000 women – than non-Hispanic white women – 33 per 1,000 women (Finer and Zolna, 2010).

Three-quarters of abortion patients in the United States are poor or low-income, and nearly half live below the US federal poverty line (Guttmacher Institute, 2016). This is striking as only one in seven women aged 15-44 (the childbearing age range) in the United States live in families with incomes below the federal poverty line (March of Dimes, 2022). 

Figure 2: Abortion patients who are poor or low-income

Source: Guttmacher Institute, 2016

It follows that ease of access to abortion services may be an important determinant of the trajectory of women’s reproductive, economic and social lives. 

How does abortion access affect women’s reproductive, economic and social outcomes?

Birth rates

Using the analytical method discussed above, one study estimates that legalising abortion (Roe v. Wade) resulted in a 4-11% reduction in births in the repeal states relative to the rest of the United States. It showed that the effects on fertility were around three times greater for adolescents and women of colour (Levine et al, 1999).

Further research indicates that legalising abortion resulted in a 34% decline in the number of women who become teen mothers, with even larger effects for black teenagers (Myers, 2017).

Researchers have also looked at the effect of practical restrictions on access to abortion in the United States, particularly variations in travel distance as a result of facilities closing. This work suggests that, on average, a travel distance increase from 0 to 100 miles cuts abortions by 20.5%, consequently raising births by 2.4%. An increase from 100 to 200 miles lowers abortion rates by 12.7% and increases births by 1.6% (Myers, 2021).

Other studies also show that travel distance is a significant factor in seeking abortion among all ages and ethnic backgrounds, particularly young and black women (Myers, 2021; Venato and Fletcher, 2020; Lindo et al, 2020).

In light of the Supreme Court decision, stricter abortion legislation may also appear in the form of mandatory waiting periods between consultation and procedure. One study finds that requiring two appointments reduces abortions (by 8.9%) and delays those that still occur, causing second-trimester abortions to rise by 19.1%. This also increases births by 1.5% (Myers, 2021). As of June 2022, 27 US states had enforced mandatory waiting periods, 13 of which require two in-person visits (Guttmacher Institute, 2022). 

These outcomes vary considerably across different groups of women. Those in their twenties are roughly three times more likely to be affected by waiting periods requiring two trips than women in their thirties. Similarly, non-Hispanic black women experience greater effects (2.5 times) from providers requiring two trips than non-Hispanic white women (Myers, 2021). County-level data indicate that these results are notably larger in low-income areas and they are amplified by longer travel distances. 

Marriage

Several studies show that having access to abortion delays both first births and first marriages (Myers, 2017; González et al, 2018; Brooks and Zohar, 2021). In particular, abortion access without parental involvement decreases the probability of ‘shotgun’ marriages by approximately 50% among young women, according to US data (Myers, 2017). 

In addition to reducing the number of women who became teen mothers, the legalisation of abortion also led to a 20% decline in teen brides. This effect was larger for black teenagers (Myers, 2017).

A recent study from Israel – where abortion is legal – looked at the effects of expanding free abortion: it found that early unintended parenthood fell by 11-14 percentage points and subsequent marriages dropped by 11 percentage points among young women (Brooks and Zohar, 2021).

Economic outcomes

The Israeli study also found that the expansion of free access to abortion led to a shift from full-time to part-time employment and to better paid part-time jobs among the women who were previously working part-time (Brooks and Zohar, 2021). This could be explained by the reported increase in the share of mothers who entered an academic institution as a result of the policy reform and therefore needed more flexibility.

In addition to higher college enrolment, the researchers also observed increases in post-high school professional training and a higher probability of sitting the Israeli matriculation exam in a given year. Despite the observations being short-term, the study also reports that the new policy resulted in around a 17% increase in annual income regardless of the woman’s employment status (Brooks and Zohar, 2021). 

Research that captures the long-term effects of the 1970s abortion legalisation in the United States on educational attainment, labour market participation and earnings for female adolescents offers similar results.

While the results for white women are minimal or insignificant, increases in the employment rate, high school graduation rate and college enrolment due to the abortion reform are more pronounced among young black women (Angrist and Evans, 2000).

Albeit imprecisely measured, one study finds that access to abortion increased college enrolment by 100%, college graduation by two to three times and employment status by 44% for black women (Jones, 2021).

Another study finds an increase of around 2% in the probability of a woman being employed in states that legalised abortion prior to Roe v. Wade (Kalist, 2004). Again, these results show a particularly strong effect among black women.

Impacts on children

Women’s access to abortion services can also affect the average conditions into which children are born. Although evidence on the effect of abortion access on child abuse and neglect is limited, one study that examines variations in the timing of abortion legalisation across US states following Roe v. Wade finds that the legalisation reduced the number of recorded cases of child maltreatment by approximately 10% for every subsequent cohort (Bitler and Zavodny, 2004). It nevertheless reports an inconsistent relationship between the number of reported cases and abortion restrictions imposed after the legalisation.

Another study finds that a child born due to poor access to abortion would have faced a 50% higher risk of living in poverty, a 60% higher probability of being raised by a single parent and a 40% higher chance of dying before reaching the age of one (Gruber et al, 1999).

This research indicates that abortion access improves overall outcomes of entire generations (Ananat et al, 2009).

Health

As has been highlighted by medical professionals and pro-choice campaigners, safe access to abortion is also vital for women’s health. According to the United Nations, unsafe abortions result in approximately 47,000 deaths every year. These are primarily in developing countries and among members of socio-economically disadvantaged and marginalised populations (United Nations, 2021).

But limiting access, as has happened in the United States, will be likely to increase the incidence of unsafe procedures. Research shows that following Roe v. Wade, pregnancy-related death and hospitalisation due to complications from unsafe abortions plummeted (Cohen, 2009).

Indeed, other research has shown that access to legal abortion reduced maternal mortality among non-white women by 30-40%, although this had little impact on overall or white maternal mortality (Farin et al, 2021).

In addition, a recent study estimates that banning abortion in the United States would lead to a 21% rise in the number of pregnancy-related deaths overall, and a 33% increase among black women (Stevenson, 2021).

Conclusion

Access to abortion directly affects the birth rate and has significant ripple effects on the social and economic outcomes of women and their families. 

The effects – on education, employment and health – are felt more acutely by certain groups. Black, young and poor women are much more likely to be negatively affected by a lack of access to abortion.

Evidence tells us that restricting abortion access – whether through laws or creating financial or other obstacles – can have harmful effects on society’s most disadvantaged women. Conversely, research shows that legalising access to abortion can lead to women gaining higher education levels and better employment.

The Supreme Court decision to revoke Roe v. Wade is both an issue of women’s rights but also of racial and socio-economic inequality.

Where can I find out more?

• How banning abortion affects the economic lives of women: Ones & Tooze podcast from Foreign Policy.
• Reproductive policy: by Caitlin Knowles Myers.
• The economics of abortion: Pitchfork Economics podcast.
• Reversing Roe: 2018 documentary film directed by Ricki Stern and Anne Sundberg.
• What can economic research tell us about the effect of abortion access on women’s lives? Brookings Institution report by Caitlin Knowles Myers and Morgan Welch.
• Planned Parenthood.
• Guttmacher Institute.

Who are experts on this question?

• Caitlin Knowles Myers
• Morgan Welch
• Ana Langer

Authors: Alicja Kobayashi and Madeline Thomas

Photo of Stop Abortion Bans Rally from Wikimedia Commons

The post How will the reversal of Roe v. Wade affect American women? appeared first on Economics Observatory.

Figure 1: Number of free packs distributed – by year

Source: Bloody Good Period

Period poverty is often talked about in terms of financial hardship, where people struggle to afford period products. In 2019, the UK government pledged to end period poverty by 2030. Their approach has varied greatly across the country, with policies to improve access to products being introduced in some, but not all, areas.

These include the Welsh government’s provision of £1 million to tackle period poverty, the Department for Education’s ‘Period Products Scheme’ in England, the passing of Scotland’s ‘Period Products (Free Provision) Bill’ and the approval of a pilot project to provide period products in all primary and secondary schools in Northern Ireland.

In addition, the ‘tampon tax’ was abolished in January 2021, scrapping the 5% VAT on disposable period products nationwide, in recognition that period products are essential items.

Why is period poverty still such a problem?

Research shows that many people struggled to access period products during the pandemic and continue to do so today. In a study surveying 240 people, 85% stated they had difficulties getting period products during lockdown. Of these, 30% reported that this was due to financial problems, including losing their jobs or being furloughed (Williams et al, 2022).

Non-profit organisations that provide access to free period products experienced huge increases in demand for products during the pandemic, highlighting some of the reasons why period poverty increased despite the introduction of government policies to address the issue.

The reasons for this rise included the emergence of new groups experiencing period poverty for the first time (such as students and NHS staff), supply shortages and hoarding of products, the closure of places that would normally provide access to products (such as schools, libraries and public toilets) and the failure to recognise period products as ‘essential items’ in care packages for those who were shielding.

Although lockdown measures were lifted in the UK in July 2021, concerns over funding uncertainties and central support remain for the organisations that provide support to those experiencing period poverty. Much of this is linked to the shift in government priorities during the pandemic.

Non-profit organisations will continue to provide the majority of support, until the policies introduced to improve access to free period products are effectively implemented across the whole of the UK.

What about the cost of living crisis?

There is a risk that rising prices will further exacerbate period poverty in the UK. There have already been reports of large increases in demand for products as a result of the cost of living crisis during the first quarter of 2022.

People are having to choose between essentials as the cost of energy and food continues to rise. In this case, hygiene essentials – which include period products – are often forsaken. As a result, there has been a rise in the use of ‘hygiene banks’ – services that provide access to toiletries and other essential hygiene items including soap, toothpaste, cleaning products and nappies (as well as period products).

An increase in the production cost of disposable period products due to inflation and supply issues is also having an effect. Some supermarkets and suppliers have increased the cost of such period products. Tesco, for example, has doubled the price of its least expensive period pads from two pence per pad (23p for a pack) to four pence per pad (42p for a pack). This means that any gains made with the abolition of the 5% VAT tampon tax have been wiped out.

The rising costs of period products will not only affect the ability of women, girls and people who menstruate to buy these essential items but will also mean that non-profit organisations will find it increasingly difficult to purchase the quantity of products they need to meet increasing demand.

This increase, coupled with a decrease in donations that such organisations would typically receive as people reprioritise their spending, could further hinder their ability to continue to provide support for those experiencing period poverty.

What are the implications of rising period poverty?

There is currently no consistent central government strategy or funding in place to address period poverty, despite claims that money would be available. In 2019, the then Minister for Women and Equalities, Penny Mordaunt, stated that the government would provide ‘£2 million funding through UK Aid Direct to for projects to help women and girls living in poverty to manage their periods with dignity’. Also promised was a further £250,000 of seed funding from the Government Equalities Office ‘to support the work of the [period poverty] taskforce’. It is still not known how or if this money has been spent.

With the pandemic and the cost of living crisis making the situation worse for people experiencing period poverty, as well as for organisations providing support for these individuals, there is a clear need for the UK government to honour its pledge to ‘end period poverty by 2030’. Until then, the cost of living crisis is likely to have a disproportionate effect on women, girls and people who menstruate from lower-income households.

Where can I find out more?

• Periods in a pandemic: how UK period poverty initiatives have mitigated Covid-19 challenges.
• Cost of living crisis has exacerbated period poverty, charities say’: The Guardian.
• Period products up in price as inflation hits menstrual care sector: The Grocer.
• Tesco no longer cheapest for sanitary pads after it DOUBLES price – here’s where to find the cheapest now: Money Saving Expert.

Who are experts on this question?

• Gemma Williams, Birmingham City University
• Alison Briggs, University of Manchester
• Menstruation Research Network
• Plan International UK

Author: Gemma Williams

Photo by Ildar Abulkhanov from iStock

The post How is the cost of living crisis affecting period poverty in the UK? appeared first on Economics Observatory.

Activity in the housing market has remained robust despite the stamp duty relief ending on 30 September 2021. The latest Halifax House Price Index Report for April 2022 suggests that house prices increased by 10.8% year-on-year in April 2022. This means that the average price for a house in the UK is now £286,079 – up by £47,668 from a year ago. This is the tenth consecutive monthly rise, which is the longest streak since 2016.

Why have house prices surged?

House price inflation started to accelerate at the end of 2020. Prices then rose significantly following the end of the nationwide lockdown in the first quarter of 2021, with several factors contributing to this increase.

A lack of discretionary spending opportunities during the periods of lockdown helped to boost household savings by around £200 billion. This meant that people had more savings to spend on property once lockdown was over.

The increase in remote working led to greater demand for larger houses, as people looked for properties with extra rooms that they could use for offices. Halifax suggests that in April 2022, prices for detached and semi-detached houses had increased by over 12%, compared with 7.1% for flats, over the past year.

The extension of the job furlough scheme also helped to support income levels and confidence. And the generally low interest rates, together with the stamp duty holiday, made buying a house cheaper during the pandemic.

Figure 1: Annual percentage change in UK house prices

Source: Office for National Statistics (ONS)

Central banks have also played a part in driving up house prices. The loosening of monetary policy and the relaxation to 0% of the ‘countercyclical capital buffer’ (which requires banks to hold a specific percentage of capital as a buffer during times of high credit growth, so it can be released during a downturn when credit growth slows) during the pandemic prevented a sudden tightening of financial conditions and encouraged banks to continue lending to help the recovery.

This further supported housing demand, pushing up prices. In November 2020, mortgage approvals reached their highest level since before the global financial crisis of 2007-09, and housing transactions through 2021 were higher than the average levels seen in the decade before Covid-19. In line with this, there has been an increase in total mortgage lending by banks throughout the pandemic (see Figures 2 and 3).

Low (and even negative) real interest rates since 2008 have helped to boost house prices. Planning restrictions and supply chain bottlenecks over the past year have also limited the procurement of key materials for construction. This has had the knock-on effect of keeping the supply of new homes tight and prices elevated.

Figure 2: Total number of mortgage approvals and housing transactions

Source: Bank of England

Figure 3: Total outstanding value of residential mortgages

Source: Financial Conduct Authority

What about mortgages?

Commercial banks have supplied mortgages throughout the pandemic-induced recession, including through the government-backed 95% mortgage scheme, which helps buyers to secure a mortgage with a 5% deposit.

So, the question is whether higher interest rates will cause house prices to fall sharply and bring about defaults and a housing market crash. This is unlikely for four reasons.

First, it is expected that there will only be a gradual increase in borrowing costs, with the Bank of England’s Monetary Policy Committee anticipated only to increase its policy interest rate from 1% to around 2.5% next year.

Second, household credit growth in the three months to June 2021 was 3.7%. This is higher than the 2019 average of 2.8% but still low compared with historical standards (and almost five times lower than before the global financial crisis). This suggests that, lately, credit growth has continued to be better controlled, which may have limited the accumulation of systemic risk as housing costs rise.

Figure 4: Proportion of different loan-to-value (LTV) ratios

Source: NMG

Figure 5: Debt-to-income ratios

Source: ONS, UK Finance

Third, in the period before the pandemic and even following it, the proportion of high loan-to-value (LTV) and loan-to-income (LTI) mortgages has fallen (see Figures 4 and 5). Likewise, household total debt-to-income ratios (the proportion of debt taken relative to the applicants’ income levels) and mortgage debt-to-income ratios have remained stable throughout the period of the pandemic, and they are 10-20 percentage points lower than during the global financial crisis.

This fall in the proportion of risky mortgage lending since the financial crisis has limited the build-up of financial vulnerabilities.

In June 2014, the Bank of England’s Financial Policy Committee introduced more thorough affordability checks on potential mortgages, with banks calculating the debt service ratios of applicants based on an interest rate that is three percentage points higher than the current rate.

At the same time, banks have also faced limits on the number of very high LTI mortgages they are allowed to supply: specifically, no more than 15% of new mortgages can be at LTI ratios of 4.5 or greater.

This set of ‘macroprudential’ policies has helped to manage mortgage lending risks.

Figure 6: Proportion of residential lending to individuals – by type

Source: Financial Conduct Authority

Fourth, there has been an increase in the proportion of fixed rate mortgages in the UK. These now account for 90-95% of total mortgages taken out by homeowners (see Figure 6).

These homeowners are already tied into a mortgage product that offers, for example, a fixed rate of interest for either two years or five years. This means that an increase in the interest rate is not going to have an immediate effect on their monthly repayments.

New mortgage applicants may be affected by higher interest rates, but once they have had their rate locked in as part of fixed term deal, they will be cushioned from future changes.

On the other hand, variable rate mortgage owners will experience higher monthly mortgage payments in line with higher nominal interest rates. But given that only 5% of mortgage owners are on such a scheme, it is unlikely that the impact from higher rates on these borrowers will cause significant distress across the housing market as a whole.

Figure 7: Residential loans to individuals

Source: Financial Conduct Authority

Another factor that will help to prevent a meltdown of the housing market is the greater proportion of double income households with mortgages. Figure 7 shows that there has been a general increase in the number of mortgages supplied to joint income households over the last ten years.

Even though there was a slight reduction throughout 2021 (potentially because some people were more reluctant to take on the risk of purchasing mortgages and houses because of greater uncertainty around how the pandemic would affect their employment and income), they still account for 65% of the mortgages supplied in the regulated mortgage market.

A household managed by two individuals with two sources of income is likely to be better equipped to cushion themselves against higher living costs. The prevalence of these types of homeowners will therefore also reduce the probability of large-scale default. It is also possible that two employed and financially secure individuals may be more confident when purchasing a house, irrespective of the current climate, further supporting housing demand and underlying prices.

How might the cost of living crisis affect tenants in rental accommodation?

Outright homeowners and those with fixed rate mortgages are not the most vulnerable groups in this context. The worsening cost of living crisis is likely to have more of a direct impact on those renting, those in sheltered accommodation or borrowers on variable rate mortgages.

Landlords can increase rental rates as economic conditions change – for example, in response to rising utility bills or even in wake of lower property prices (see Figure 8).

In February 2022, the Royal Institute of Chartered Surveyors (RICS) reported that over the next year, rental prices are forecast to increase by 4% on average across the UK. On a regional basis, the survey suggests that in relatively lower-income parts of the South East of England and the East Midlands, rental growth will be limited by the worsening cost of living crisis.

Rental tenants are more susceptible to fluctuations in disposable incomes, which can affect budgeting (unlike fixed rate mortgage owners who have clear foresight of their monthly repayments for the term of their mortgage). This means that surging food and energy prices are more likely to hit renters, reducing demand for rental properties rather than residential properties.

Figure 8: Annual growth in UK private rental prices

Source: ONS

Conclusions

Looking ahead, in the short term, increased demand for larger residential homes, together with tight supply because of planning restrictions, will continue to support UK house prices.

The prospects of higher nominal interest rates may start to slow the strong growth in house prices and demand towards the end of this year, as mortgage rates rise. But the increase in the Bank of England’s policy rate from around 1% this year to 2.5% next year is unlikely to lead to a collapse in house prices, especially as interest rates will be raised gradually.

The surging cost of living – which is squeezing disposable incomes – together with record high house price-to-disposable income ratios are more likely to affect those in rental accommodation or with variable rate mortgages compared with fixed-term mortgage holders.

The higher cost of living may even discourage risk-taking by prospective homeowners, particularly single applicants, especially if they are forced to run down savings to help to cope with the higher cost of living. This may in turn depress demand for new housing, slowing down price growth.

Where can I find out more?

• Housing transactions now rising but a substantial shortfall this year due to Covid-19: Barry Naisbitt analyses the trend in housing transactions during the pandemic.
• Planning to fail? Ian Mulheirn evaluates whether increasing supply would reduce house prices.
• Property millionaires: The growing housing divide: Paul Cheshire provides an outlook on how the housing market might evolve.
• There’s more to house prices than interest rates: Lisa Panigrahi and Danny Walker suggest that low interest rates were not the only driver behind surging house prices during the pandemic.

Who are experts on this questions?

• Barry Naisbitt
• Paul Cheshire
• David Miles
• Geoff Meen
• Christine Whitehead

Author: Urvish Patel

Photo by Andrew Michael from iStock

The post What next for the UK housing market? appeared first on Economics Observatory.

Housing retrofits – whereby existing buildings are changed to improve their energy efficiency and reduce emissions – are useful case studies of these challenges and the progress being made to overcome them.

We know that more than 80% of the housing stock that the UK will have in 2045 already exists. In other words, the required retrofit is a massive financial and physical programme lying ahead. It is made even more challenging by the fact that the country’s housing stock is comparatively old and highly variable in terms of quality and condition.

Can tenement buildings offer an example?

Scottish cities – and Glasgow in particular – have an instantly recognisable built form: the traditional pre-1919 tenement of walk-up flats fronted by red or blond sandstone exteriors. There are 73,000 such flats in Glasgow, more than a fifth of the city’s stock.

They form part of successful high-density neighbourhoods across the city, and come in all housing tenures, often mixed within a given close(that is, a group of flats linked by a common stair and front entrance). Some are in poor condition and in need of repair, and they suffer from the problem of coordinating common repairs among multiple owners.

Tenements also leak carbon and are expensive to heat and insulate – problems exacerbated by net-zero ambitions and rising fuel prices. Plans to retrofit these buildings also need to be consistent with a strong heritage conservation constituency, which seeks to maintain traditional design, materials and the wider aesthetics of tenement living.

This is the context that Glasgow and urban Scotland more generally faces when contemplating how to secure a future for a low-emissions tenement sector.

It was against this background that a unique partnership was formed in 2019 to work through a deep (EnerPHit) retrofit, a near equivalent to PassivHaus for existing properties. Both EnerPHit and PassivHaus are building standards that seek to reduce energy demand and generate net-zero emissions through construction methods, intelligent insulation and renewable heating and power. 

The aim has been to launch a demonstration project to prove that this kind of retrofit could be done for pre-1919 tenements. It also seeks to draw replicable lessons for the city's tenement strategy.

An eight-flat property in Niddrie Road on the inner south side of the city was taken over from a private landlord by a Southside housing association. City council and housing association funding was supplemented by Scottish government funding for the renewable element.

The project was slowed by Covid-19, but it will nonetheless deliver the high degree of 'fabric-first' airtight internal and external insulation, mechanical ventilation, waste water recovery as well as other key features (for example, half the properties deploy air source heat pumps).

The fabric-first approach involves a focus on physical property retrofit as opposed to simply changing from fossil fuel energy to something renewable. It recognises that the buildings themselves need to be made energy efficient through better insulation, ventilation and the like to make the most of reduced energy demand.

The properties will be handed over to new social tenants in June 2022.

Evaluation

The project’s evaluation, resourced by the Scottish Funding Council, consists of several discrete but integrated elements:

• A decision-making account recording the process of undertaking the project and the key decisions made internally and externally, in real time.
• A formal cost-benefit analysis drawing on HM Treasury’s Green Book of appraisal of public investments, as well as the government’s environmental accounting estimates for carbon (including scenarios for future valuations of carbon), complete with realistic counterfactuals (including demolish/rebuild; achieving the current Scottish government social housing target EPC ‘B’ in retrofit; and the net-zero EnerPHit retrofit). Central estimates are compared and contrasted by varying key assumptions and conducting sensitivity analysis.
• A technical building energy consumption assessment and evaluation of the extent to which EnerPHit levels of retrofit are achieved in practice.
• A pre- and post-occupancy survey of the tenants, asking about their experiences of living in the retrofitted property.

Early evaluation suggests that this type of project scores well in cost-benefit terms, but it is nevertheless expensive. While there are important lessons from aspects of the demonstration project and it can serve as a model for other retrofits in the UK, challenges remain. The latter two elements of the evaluation will be completed in the winter of 2022/23.

What does the decision-making account indicate for these types of projects?

First, this kind of project can be done, but it is a major realisation and requires commitment from partners and strong leadership.

Second, it is precedent-setting and has to engage closely with what city planners are willing to modify within their existing planning policy for traditional tenements.

Third, winning the Scottish Funding Council evaluation helped to bring in other public funds for the project.

Fourth, there are many second order questions or multiple objectives that had to be resolved in real time as the project evolved during lockdown. Examples include determining what was required to achieve the EnerPHit standard; how best to overcome technical issues with the fabric-first approach given the poor quality of the building; and deciding on the feasibility of different renewable solutions, such as air source heat pumps versus gas boilers or electric heating.

Lastly, it is apparent that the project had advantages that would not always be applicable in other retrofits. In particular, the eight properties were unoccupied and hence there were no temporary alternatives required for residents (known as decanting). Further, there were no housing tenure complications, which would ordinarily be common across Glasgow as individual tenement blocks often house multiple tenures.

Nonetheless, the council have confirmed that there are already evident lessons that can inform how they take their city tenement strategy forward. Examples include the scope for deep retrofit with most, though not all, of the gains associated with this demonstration project and at lower cost. There are also lessons about which components generate impacts, for example, the importance of airtight insulation and good ventilation, and the need for good training and support for residents moving into such properties.

As a result of the project, the construction firm also recognised that there were opportunities for creative phasing of the retrofit works over a period of time, perhaps across larger blocks of properties, which could reduce the disruption for residents.

What does the cost-benefit analysis tell us?

In absolute terms, the cost of the demonstration project was high. Each unit cost a combination of £60,000 for initial acquisition, £44,000 for the basic refurbishment and a further £32,000 for the EnerPHit standard and a £12,000 contingency charge for uncertainties that arose (£148,000 in total).

This was in part because the standard of retrofit was so high, but also because of the poor condition of the property itself. About half of the costs were met by direct grant funding from the city council (primarily) and the Scottish government, with the other half to be repaid out of rents.

The baseline analysis indicates that under a range of scenarios, the EnerPHit retrofit or the lower level refurbishment (equivalent to EPC level B) are always better options than to demolish and rebuild. It is less clear financially whether the net benefit is better for one or other of the retrofit options (it varies across sensitivity analysis options). But only the EnerPHit version delivers net zero and radical reductions of 80-90% in average fuel costs (both in theory and observed in comparable non-tenement projects).

What are the wider implications?

While it will be the spring of 2023 before a comprehensive picture of the retrofit evaluation is available, some lessons can be drawn from the project.

EnerPHit is expensive, but what matters for retrofits is the use of fabric-first airtight insulation plus good ventilation. Not all properties will require the extent of refurbishment required in the demonstration project. The focus should be on fabric and renewables combined rather than the specific choice of renewable alone. This allows for a wider choice of energy renewable systems for the residential sector. This will have relevance for other older property archetypes, as well as tenements.

One important challenge is how to give owners (including landlords) the incentives to make these changes to their properties. Further, how do we solve the classic problems of the tenement built form – that is, organising and paying for collective or common repairs across different flat owners? How do we package together small area-based programmes and sequence them to reduce disruption and resident decanting during the works phases?

The Scottish Law Commission is currently examining legal reform to promote ownership associations, sinking funds and mandatory property inspections. It also looks as if other housing associations with tenement properties in Glasgow are exploring close to EnerPHit alternatives that may be a little more affordable as investments.

Mass retrofit requires significant economic restructuring and the greening of supply chains, and a host of services relating to domestic energy use. But the lesson from this demonstration project, as well as elsewhere, is that retrofitting must be fabric-first and thereby reduce the energy demand that households require. This implies considerable new work for construction sector trades, even if it is not at the demanding level that EnerPHit requires of a pre-1919 tenement.

Where can I find out more?

• A cost-benefit analysis of a traditional Glasgow tenement net-zero retrofit: Report by Anthony Higney and Kenneth Gibb.
• UK Collaborative Centre for Housing Evidence, CaCHE.
• John Gilbert Architects.
• Low Carbon Homes.
• What is EnerPHit?

Who are experts on this question?

• Tim Sharpe, University of Strathclyde
• Kenneth Gibb, University of Glasgow
• Aimee Ambrose, Sheffield Hallam University

Author: Kenneth Gibb

Photo by Drimafilm from iStock

The post Retrofitting the UK housing stock: what lessons from Scotland’s tenements? appeared first on Economics Observatory.

In economics, this is referred to as ‘consumption smoothing’, whereby households use savings accumulated in earlier periods to finance their day-to-day activities and maintain their living standards during downturns. 

While research shows only a weak link between earnings and wealth, there is no doubt that households with higher earners and a greater number of individuals in work can better withstand an unexpected economic shock (Pfeffer and Waitkus, 2021). 

In the case of Covid-19, blue-collar workers were disproportionately affected, due to the types of occupations and sectors in which they work (OECD, 2021).

Further, evidence shows that ethnic minority groups in the UK were more likely to report using savings and/or borrowing to mitigate earnings losses experienced early in the pandemic (Crossley et al, 2021a). 

Indeed, Covid-19 brought into sharp focus the vast differences in wealth among individuals and households. These have received growing attention in recent years, following the influential work of Angus Deaton, Thomas Piketty and Emmanuel Saez, among others. 

Inequalities in wealth within countries are stratified by certain characteristics, such as race. The UK provides a useful case study in this respect, given the range of different ethnic minority groups in the country, many of which emigrated from Commonwealth countries throughout the second half of the 20^th century. 

Based on observable characteristics, such as health, education, income (including earnings) and wealth and outcomes such as poverty, ethnic minority groups have assimilated and thrived to varying degrees. But typically, people in these groups are relatively poorer and less wealthy than their white counterparts (Modood et al, 1997; Nandi and Platt, 2010; Fisher and Nandi, 2015; Perez-Hernandez et al, 2018).

The pandemic has exacerbated existing wealth inequalities both across and within different ethnic minority groups in the UK. To understand the impact of the crisis on the racial wealth gap, we first need to understand differences across groups before the arrival of the virus.

Differences in wealth inequalities by major ethnic group in Great Britain 

There are five major ethnic minority groups in Great Britain. Figure 1 shows average differences in total net household wealth just prior to the pandemic. The data, taken from the Wealth and Assets Survey conducted by the Office for National Statistics (ONS), are split by ethnicity, compared with the white British group. The ethnicity assigned to each household is that of the head of the household. Total net household wealth is defined as the sum of net wealth held in property, private pensions, financial and physical items. 

Figure 1: Total net household wealth by ethnic group relative to the white British group

Source: ONS, 2022 
Note: Estimated difference in total net household wealth after controlling for age, sex, education level, socio-economic classification of the head of household, housing tenure and household composition; April 2018-March 2020 prices.

After controlling for important demographic and socio-economic factors, the data show that Pakistani, black African, Bangladeshi, Indian and other Asian households all report significantly lower levels of total net wealth compared with white British households. 

Two notable findings emerge from Figure 1. First the magnitude of the differences between groups is large. For example, the average white British household has a total net wealth of £243,700 more than the average Pakistani household. 

To benchmark the wealth gap, we note the average level of total net wealth among all households (which includes all ethnic minority groups) based on the same data is £576,235. 

Second, the data highlight significant variation in total net household wealth within the same ethnic group. As a result, while there is a wealth gap between certain ethnic minority groups and white British households, there are no statistically significant differences in average wealth holdings between Pakistani, black African, Bangladeshi, Indian and other Asian households. 

It is also important to note that wealth is heavily skewed and under-reported (see Advani et al, 2021). This means that the differences shown when using group averages (as in Figure 1) are affected by households with extreme wealth holdings. 

For example, if instead one compares the difference in total net median household wealth holdings between Pakistani and white British households, the gap is £164,200 (in favour of white British households). The difference between Indians and white British is -£19,500 – that is to say, median total net wealth is higher among Indians (ONS, 2022).

What contributes to net wealth within different ethnic groups?

To understand how the pandemic has affected different ethnic groups to varying degrees, it is important to consider how the composition of household wealth portfolios varies across groups. 

Total net wealth can be broken down into four components: property, financial, physical and private pension wealth. Figure 2 splits out total median household net wealth by the contribution made by each of these wealth types. 

Figure 2: Total and sub-components of median wealth household wealth by ethnicity

Source: ONS, 2022 
Note: Estimates of total household net wealth and sub-components (property, pension, physical and financial) by ethnic minority group; March 2018-April 2020 prices.

Figure 2 shows considerable differences in the level of certain types of wealth and the overall composition of household wealth portfolios held by ethnic minority households. While for most households, property and pensions typically account for the majority of total net household wealth, Indians hold a relatively larger share of their total wealth in the form of property, even compared with the white British group (44% compared with 25%). Comparably, black Africans only hold 13% of their total net household wealth in this form. 

This reflects the fact that around 80% of Indians are likely to hold housing wealth compared with only 39% and 29% of black Caribbeans and black Africans, respectively (ONS, 2020). The average level of net property wealth is also higher for this group. 

For example, the median level of net property wealth held by Indian households is £165,000 versus zero held by black Caribbeans and black Africans – precisely because a higher fraction of the latter two groups report not holding property wealth at all (ONS, 2022).

In the case of pension wealth, the median level of household private pension wealth held by Indians (at £57,100) is far lower than white British households (at £84,800). This is still higher than any other ethnic minority group (ONS, 2022).

This is likely to be explained in part by the labour market characteristics of household members in white British households compared with ethnic minority groups. These include whether they are employed or self-employed, the sectors in which they work, differences in earnings and the number of individuals employed (Vlachantoni et al, 2015). 

The trend in financial wealth held by ethnic minority groups follows a similar pattern to that for housing and pension wealth. But for the majority of households, except the most wealthy, financial wealth constitutes a relatively small fraction of total household net wealth. There is also no clear pattern by ethnic minority group in the case of physical wealth, which includes household goods and vehicles. 

What has been the impact of Covid-19 for ethnic minorities and wealth inequalities?

Covid-19 has exacerbated existing wealth inequalities (Leslie and Shah, 2021; Xu et al, 2022). The nature of the pandemic and its implications for hybrid working caused a surge in demand for housing, which has driven up prices, particularly in areas outside major cities like London. This has been further exacerbated by existing shortages of suitable housing stock. 

The pandemic also bought into focus the importance of owning particular asset types, such as housing, prior to the pandemic. Those groups that owned homes saw sharp and significant increases in their housing wealth. Pension and financial wealth were also directly affected due to their close links with financial markets. Following a sharp deterioration, markets rebounded quickly, and in early 2022, they are close to reaching pre-pandemic levels in the UK. 

Separately, the pandemic has accelerated structural changes in the labour market resulting from rapid technological change, including teleworking, automation and artificial intelligence. These changes imply that earnings and income inequality are likely to have diverged further, given already increasing wage polarisation (Georgieff, 2021).

Jobs in certain sectors of the labour market or those that are low paid – which require repetitive non-cognitive tasks – are more likely to be automated. Evidence suggests that this happened in the textile industry during the 1990s in the UK, disproportionately affecting Indian, Pakistani and Bangladeshi groups (Clark and Shankley, 2020).

What does this imply for ethnic minority wealth inequalities? Data covering the pandemic period are not currently available, but we can infer several likely outcomes given what we know about ethnic minority groups prior to the pandemic and evidence from other studies. 

First, there are effects in terms of differences in homeownership and where ethnic minorities reside. House prices increased by 10.8% between December 2020 and December 2021 alone, and the average house in the UK is now worth £275,000 (ONS, 2022a). 

As a result, in the absence of significant changes in housing tenure over the pandemic period, certain groups, such as Indians and the white majority, are likely to have benefited disproportionately from this price increase. This still applies even if the former group was more likely to reside in London, which saw a relatively smaller increase in property values. 

On the other hand, groups that are more likely to rent in the private sector, such as black Africans and Pakistanis, have experienced rent increases, particularly in the latter part of the pandemic. Average rents are predicted to have risen by 2% between January 2021 and January 2022, with further increases expected (ONS, 2022b). 

The fact that average house prices were 6.7 times average earnings in early 2022 (up from 5.8 in 2019) implies that homeownership opportunities are deteriorating (The Guardian, 2022).

Research also shows that ethnic minority groups were more likely to become unemployed rather than put on furlough. This meant that people in these groups were more likely to draw down savings (reducing their wealth) or borrow (increasing their debt) during the early phase of the pandemic compared with their white counterparts (Crossley et al, 2021a; 2021b).

While the employment gap between ethnic minorities and the white majority had returned to pre-pandemic levels by March 2021 (Crossley et al, 2021b), the initial job displacement meant that a higher proportion of ethnic minorities experienced a period of unemployment before making the transition to a new job.

Evidence also shows that savings rates were much lower, and conversely debt increased, among individuals with the lowest incomes before the pandemic (Crossley et al, 2021b). This is typically more likely to include individuals belonging to an ethnic minority group (Platt, 2011; Perez-Hernandez et al, 2018). 

Financial markets have broadly recovered since the drop at the start of the pandemic and despite the recent disruption due to the war in Ukraine. But the changes to pension wealth over the course of the pandemic will depend on an individual’s employment history, age and the underlying portfolio structure of their pension pot.

The extreme swings in market volatility and the fact that a large proportion of certain ethnic minority groups – such as Pakistanis, Bangladeshis and black Africans (particularly older individuals) – do not have any pension wealth suggest that the distribution of this is likely to remain highly unequal. 

On the other hand, financial wealth is heavily concentrated among the wealthiest in society and, as discussed above, it is more likely to be held by the white majority and certain ethnic minorities. 

ONS analysis of the Wealth and Assets Survey covering the period 2018-20 highlights that 8% of black African households hold negative net financial wealth – in other words, they are in debt. The median financial wealth level held by these households is £200, compared with around £11,700 for Indian households. 

Evidence suggests that even prior to the pandemic, inequality in financial wealth was increasing (ONS, 2019). Going forward, inequality in this type of wealth is likely to have increased further. 

Conclusion 

Wealth plays a central role in determining an individual’s living standards. Along with income, it can help households to cushion unanticipated economic shocks. 

There were significant wealth inequalities prior to Covid-19 across and within ethnic minority groups. Given the composition of ethnic minority household wealth portfolios before the pandemic, it is likely that differences in household wealth have widened. This is largely because of how the crisis has affected labour and financial markets. 

This should be a concern for policy-makers. The government needs to help to support and improve living standards and ensure that all households – particularly the least well off, who are disproportionately more likely to be ethnic minority households – are able to withstand any future shocks. The pandemic has deepened an existing crisis, leaving vulnerable groups increasingly at risk to the next big challenge.

Where can I find out more?

• Wealth and Assets Survey: Data from the ONS.
• Household wealth by ethnicity: Report from the ONS.
• Ethnicity facts and figures: GOV.UK.
• Inequality and poverty: Resolution Foundation.
• Inequality (The Deaton Review): Institute for Fiscal Studies.
• Inequality within ethnic groups: Report from the Joseph Rowntree Foundation.

Who are experts on this question?

• Arun Advani
• Ricky Kanabar
• Lucinda Platt
• Thomas Crossley

Author: Ricky Kanabar

Author's note: The prices in the article using round seven of WAS reflect those reported at the time of the survey interview (between April 2018 and March 2020).
Acknowledgment: The author would like to thank the ONS Wealth and Assets Survey team for providing data relating to round seven of the survey, which was used in this article, the Economics Observatory editorial team and Alita Nandi for reading a preliminary version of this article. 

Photo by Dmytro Varavin from iStock

The post How has Covid-19 affected wealth disparities among ethnic groups in the UK? appeared first on Economics Observatory.

Importantly, research also suggests that wealth is likely to be stratified by a number of factors including membership of an ethnic minority group  (Office for National Statistics, ONS, 2020). For example, the average level of total household net wealth holdings in Pakistani and Bangladeshi households is £243,700 and £201,500 lower than that held by white British households (ONS, 2022).

Given the importance of wealth in determining living standards – and for acting as a cushion against economic shocks such as Covid-19 – having a good understanding of the factors that explain the racial wealth gap is important for the design of policies to improve wealth, social mobility and living standards more generally. 

Factors explaining differences in ethnic minority wealth holdings

Research shows that differences in education, earnings, economic status, immigration history, cultural norms and region explain differences in household wealth holdings (Byrne et al, 2020). These same factors also affect portfolio composition, which is the likelihood of owning certain types of wealth, such as housing or pensions. 

Education

Differences in educational attainment and earnings are also important for understanding wealth differences across ethnic minority groups. Research shows that first generation Indians who emigrated to the UK in the 1960s, typically from East Africa, tended to be relatively well educated and/or business owners before arriving. 

In comparison, groups such as Pakistanis and Bangladeshis, who arrived in the 1960s and 1970s, and black Caribbeans and black Africans, who emigrated during the 1950s and 1970s, were less well educated (Dustmann et al, 2011). 

A bulk of first generation migrants typically entered manual and public sector jobs in urban areas and often settled in the poorest central areas of large cities (Rex and Moore, 1969; Finney and Simpson, 2009). 

While education levels differ across ethnic minority groups, evidence suggests that there is strong intergenerational persistence within certain groups. In other words, within the same ethnic group, there is a high degree of association between the educational attainment of parents and their offspring (Dustmann et al, 2012). 

Education is strongly associated with earnings and the latter is important for access to homeownership. But while educational attainment has increased across generations for most ethnic minority groups, this has not translated into higher earnings to the same extent as for the white majority group. Therefore the strength of the assocation between education, earnings and wealth differs across minority and majority groups (Longhi et al, 2013).

Income and economic status

Although on average the ethnic pay gap has fallen over time to around 2% in 2019, there remain significant differences by ethnic minority group. For example, the median pay gap is between 13% and 16% lower among Pakistanis, white and black Africans, Bangladeshis and black Caribbeans compared with the white British group. In contrast, for Indians and Chinese, it is 16% and 23% higher, respectively (ONS, 2020).

Self-employment is more prevalent among some ethnic minorities compared with the white majority (ONS, 2021). Figures based on the Annual Population Survey show that in 2019, 23.2% of Pakistanis and Bangladeshis reported being self-employed, compared with 14.7% of Indians, 14.6% of Chinese, 11.2% of blacks and 14.9% of the white British group (ONS, 2021).

Economic status and earnings also influence pension wealth and, as highlighted above, this type of wealth – while illiquid (so inaccessible) for working-age households – constitutes an important part of total household net wealth, even though ethnic minorities hold lower levels compared with the white British group. The value of such wealth is heavily related to the performance of financial markets. 

Housing

Homeownership opportunities – which are important for wealth accumulation and reducing wealth inequalities – are likely to be affected by membership of an ethnic minority group. Recent analysis using the Wealth and Assets Survey covering Great Britain shows that homeownership and housing wealth are also increasingly stratified by parental wealth, which is lower among particular ethnic minority groups (Gregg and Kanabar, 2022). 

Further, given the concentration of ethnic minorities in low paying sectors and occupations (Longhi and Brynin, 2015), the likelihood of certain groups getting onto the housing ladder is lower, despite major programmes encouraging homeownership, such as Right to Buy during the 1980s. Education, earnings, employment and region all affect homeownership rates and hence property wealth, which, as shown above, varies significantly by ethnic minority group.

Table 1: Housing tenure by ethnic minority group and white British, 2016-18

Source: Ministry of Housing, Communities and Local Government, 2020; 2021
Note: Figures based on English Housing Survey, 2017 and 2018

Table 1 shows clear differences in housing tenure by ethnic minority group. Among Indians, 74% report owning their home outright or with a mortgage, 11% higher than the average across all groups. The equivalent figure stands at only 20% and 40% among the black African and black Caribbean groups, respectively. 

The opposite patterns holds when considering the proportion of each group that reports living in social housing: 7% among Indians compared with 44% and 40% for black African and black Caribbean groups, respectively. The figures for black groups are more than twice the average across all groups (17%). 

Not only is housing tenure important, but so too is housing adequacy relative to household size. Evidence suggests that overcrowding rates are between six and eight times higher among certain ethnic minority groups compared with white British – 41% among Bangladeshis, 32% among Pakistanis and black versus 5% among white British (Finney and Harries, 2015). 

Figure 1: Ethnicity by region (England and Wales only) in 2011

Source: Office for National Statistics, 2020
Note: Figures based on England and Wales 2011 census

Figure 1 shows that ethnic minority groups are geographically concentrated in certain regions. For example, black groups are more likely to live in London, and Asian groups are more likely to report living in London, the Midlands, and Yorkshire and the Humberside. 

Historical differences in housing values in regions such as London – combined with the initial area of settlement among first generation immigrants and differences in housing tenure – are key factors in explaining the differences in property wealth reported by ethnic minority groups. 

Social norms

Separately, it is important to recognise differences in social norms across ethnic groups in understanding wealth inequalities. The first of these relates to the participation of women in the labour market and household income and wealth. 

For example, data from the Annual Population Survey show that in 2019, only 39% of Bangladeshi and Pakistani women aged between 16 and 64 reported being in employment. This compared with 67% of black women, 69% of Indian women and 74% of white British women. 

Differences in employment rates directly influence the likelihood of homeownership, household earnings and savings, and hence wealth. A related point in this context is the prevalence of multigenerational households and the number of adults in employment. 

It is relatively more common among certain ethnic groups to live in such types of households and for there to be fewer individuals in paid employment due to household composition as well as cultural norms (Perez-Hernandez et al, 2018). 

The second issue around differences in social norms relates to intergenerational transfers, such as inheritances, which have been shown to be correlated with parental wealth and are important for explaining wealth inequalities in the UK (Palomino et al, 2021). 

Despite the lack of research on this issue, given the wealth gap between the majority of ethnic minority groups (except Chinese) and the white majority, even if the likelihood of inheritances or lifetime transfers is equal across groups, holding all else constant – so factors that affect both offspring and parent wealth accumulation – the level differences mean that wealth inequalities are likely to pass down between generations.

Taken together, compared with white British households, ethnic minorities are more likely to live in households with lower levels of total net wealth and income, with fewer people in work. They were also less likely to report homeownership. 

Finally, as has been highlighted, it is important to note the significant differences in household net wealth between and within ethnic minority groups. 

Conclusion 

Wealth plays an important role in influencing living standards throughout people’s lives. Disparities in wealth, which continue to grow over time, are especially influenced by factors such as parental wealth, education and ethnicity (ONS, 2020; Gregg and Kanabar, 2022). 

These same factors also influence the composition of household wealth holdings and whether individuals own their home. Both pension and housing wealth typically account for the bulk of a household’s total net wealth (ONS, 2020).

While white British households hold relatively high levels of housing and pension wealth, for certain ethnic minority groups – such as Indians, Pakistanis and Chinese – housing represents almost half of total net household wealth (ONS, 2022).

On the other hand, for Bangladeshis, black Africans and black Caribbeans, housing only accounts for 13% and 26% of total net household wealth. This is precisely because these groups report much lower levels of homeownership and are concentrated in areas with lower house prices.

Returns to housing are non-trivial: UK house prices have risen by 65% on average in the decade to January 2022. This significant increase highlights a two-sided story in terms of wealth gains – that is, owning versus not owning your home (ONS, 2022).

Tackling wealth inequalities is complex given that individuals accumulate wealth over their lifetimes from a variety of sources, including their parents. Indeed, evidence shows that inequality of opportunity starts early in life (OECD, 2018).

Nonetheless, continued differences in educational achievement and the fact that homeownership is increasingly stratified by parental wealth (Gregg and Kanabar, 2022) – combined with historical differences in housing tenure by ethnic minority group – mean that policy has a crucial role to play. Indeed, the fact that we observe varying levels of wealth and social mobility across and within countries highlights that such outcomes are not inevitable. 

International evidence highlights that policy-makers should focus resources on education, health and family policies, especially early in life to promote social mobility. In terms of dealing with wealth inequalities specifically, policies to limit tax avoidance with respect to wealth, inheritance and gifts have been suggested (OECD, 2018). More recently, there has also been a renewed focus in the UK on tackling regional inequalities.

It is vital to ensure that while policies to promote wealth and social mobility should benefit all individuals, they should especially help those from the least privileged backgrounds and these will inevitably include minority groups. 

Where can I find out more?

• Wealth and Assets Survey: Data from the ONS.
• Inequality within ethnic groups: Report from the Joseph Rowntree Foundation.
• Household wealth by ethnicity: Report from the ONS.

Who are experts on this question?

• Arun Advani
• Ricky Kanabar
• Simonetta Longhi 
• Alita Nandi 
• Lucinda Platt 
• Paul Gregg

Author: Ricky Kanabar

Author's note: The prices in the article using round seven of WAS reflect those reported at the time of the survey interview (between April 2018 and March 2020).
Acknowledgment: The author would like to thank the ONS Wealth and Assets Survey team for providing data relating to round seven of the survey, which was used in this article, the Economics Observatory editorial team and Alita Nandi for reading a preliminary version of this article. 

Photo by VictorHuang from iStock

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From 1 April 2022, the energy price cap increased by £693 or £708 for around 22 million customers in Great Britain. This increase is linked to the rising wholesale gas price, which rose from a monthly average of 46p per therm (a unit of heat) in February 2021 to 188p per therm in February 2022 (see Figure 1). These increases are passed on to consumers, raising household bills.

Figure 1: Average monthly wholesale gas prices for gas received the following day in Great Britain, February 2019 to February 2022

Source: Ofgem

The affordability of energy is often framed in terms of fuel (or energy) poverty. Understanding levels of fuel poverty is one way to consider the effects of these rising prices. But a multitude of fuel poverty indicators have been suggested by researchers. In England, three different official definitions have been used, while Scotland and Wales use their own definitions.

Without appreciating the variety of metrics, simple quotations of fuel poverty rates may provide a misleading sense of precision. Whether headline rates of fuel poverty pick up fluctuations in household energy bills over time depends on the statistical definition used.

How should we frame energy affordability and fuel poverty?

Why might we be concerned about energy affordability? When considering this, two things are worth remembering. First, households are concerned about the services that energy provides – in other words, heat and light – rather than gas or electricity itself. Second, a household’s energy expenditure is part of their overall decisions about how to spend their income on different goods and services.

When energy prices increase, concerns about energy affordability boil down to three possibilities:

• Households reduce the energy services that they consume.
• Higher energy expenditures reduce households’ consumption of other products.
• Consumption of energy services and other products is maintained by households incurring debt and/or drawing down savings.

This also assumes that society can agree on a minimum level of energy services (and other products) that it deems necessary or reasonable. Fuel poverty can therefore be said to be occurring when the minimum level of energy services is deemed unaffordable.

Several observations follow from this framing:

• Energy efficiency can improve energy affordability by increasing the quantity of energy services that can be bought with the same expenditure.
• Income is central to energy affordability – lower incomes make it more challenging to pay for a given level of consumption.
• Both high and low levels of energy expenditure could indicate energy affordability challenges.
• How households choose to adjust their consumption following an energy price shock will depend on their individual preferences for energy services and other products.

These four points explain why measuring fuel poverty and energy affordability is more complex than the presence of official fuel poverty statistics may suggest. Different metrics will be stronger at capturing different elements of these four observations.

What is the long-run assessment of energy affordability?

To gain a first impression of energy affordability over the long run, we can look at average (mean) household expenditure on non-motoring fuels, divided by average (median) equivalised household disposable income in the UK between 1977 and 2019/20 (see Figure 2).

Figure 2: Ratio of mean household energy expenditures over median equivalised disposable income, 1977 to 2019/20

Source: Adapted from Deller, 2022

Figure 2 indicates that the proportion of households’ income devoted to energy was much higher in the late 1970s and early 1980s than it has been since the early 2000s. Even when energy costs were last the focus of media attention (in the early 2010s), the proportion of income devoted to energy was only as high as it was in the early 1990s.

Since heat and light are necessities, the quantity of energy consumed responds by a relatively small amount to changes in price or income, at least in the short run. Economists refer to this as energy being both price inelastic and income inelastic (Labandeira et al, 2017; Zhu et al, 2018).

Specifically, when there is an energy price increase, the percentage fall in the volume of energy consumed will be lower than the percentage increase in price. Similarly, when incomes go up, the percentage increase in the volume of energy consumed will be lower than the percentage increase in income. As a result, a higher share of income devoted to energy is an indicator of worsening energy affordability.

Where might energy affordability be later in 2022?

In 2019/20, the average household expenditure on non-motoring fuels was £1,284. The value of the ratio between expenditure on these fuels and median household income (used in Figure 2) was 4.3%.

But Figure 2 is based on survey data from the Office for National Statistics (ONS), which will only become available for 2022 sometime in the future. To gain a more accurate idea of where energy affordability might be later this year, we can use the Office for Budget Responsibility’s (OBR) nominal GDP forecasts. These data can be used to estimate the median equivalised household income in 2022/23 (currently £32,270), and then plug potential energy expenditures into the ratio.

An obvious energy expenditure figure to use is £1,971 – the new level of the default tariff cap for direct debit consumers set by Ofgem, the regulator for gas and electricity markets in Great Britain. This results in a ratio of 6.1% – the highest since 1988.

One projection for Ofgem’s tariff cap for the winter of 2022/23 indicates that it could reach £2,600 (Cornwall Insight, 2022), implying a ratio of 8.1%. Such a value would be heading towards the peaks of the late 1970s and early 1980s. To surpass the 1985 peak of 9.3% would require average annual energy expenditures in the coming year to exceed £2,997.

The conclusion is that this year’s energy affordability pressures are likely to be the most serious for a generation.

What does Ofgem’s default tariff cap show?

A degree of caution with these projections is necessary. Ofgem’s cap is not the actual amount that households will spend on energy, nor is it directly comparable with the average energy expenditures in Figure 2.

Ofgem’s values are generated by assuming that households consume fixed quantities of electricity and gas, labelled ‘typical domestic consumption values’ (TDCVs). Households consuming different quantities to the TDCVs will have different energy expenditures, and not all households have a mains gas supply.

As the TDCVs are fixed quantities, the quoted figures for Ofgem’s cap do not reflect the fact that households will respond to higher energy prices by reducing their energy consumption to some extent. Only future releases of the Living Costs and Food Survey will allow the time series data in Figure 1 to be extended in a fully comparable fashion.

How have official definitions of fuel poverty varied over time?

That consumption responds to price changes highlights one of the trade-offs when measuring energy affordability and fuel poverty.

Figure 2 is based on households’ actual energy expenditures. For identifying households that cannot afford energy, a concern with using a high ratio of actual energy expenditure to income is that it may fail to pick up households that respond to affordability pressures by limiting their energy expenditure.

To address this issue, the official fuel poverty statistics in England are based on an engineering model that estimates the energy expenditures required to achieve a pre-specified temperature. The trade-offs from this approach are that differences in households’ temperature preferences are ignored and that the estimates are only as valid as the engineering model’s own assumptions. While using required energy expenditures is done for valid reasons, it also implies a potential gap between official fuel poverty statistics and the energy bills that households actually pay.

In England, there have been three official fuel poverty definitions. These changes in definition, as well as the complexity of calculating required energy expenditures, mean that there are no time series data on the official fuel poverty rate comparable to Figure 2.

Table 1 provides the core definitions of the official fuel poverty metrics (for the full definitions of income etc., see bre, 2020 and bre, 2022). Figure 3 charts the official data that are available.

Table 1: Official fuel poverty definitions in England

In Wales, the 10% metric continues to be used, while Scotland is turning to a two-part metric that combines the 10% threshold with the requirement that a fuel-poor household has an income – after housing, fuel and childcare costs – that is below the level needed for an acceptable standard of living.

Figure 3: Official headline rates of 10%, LIHC and LILEE fuel poverty in England (available data)

Source: Combines data from Department for Business, Energy and Industrial Strategy, BEIS, 2021; BEIS, 2022 and BEIS, 2013

Figure 3 shows how the different fuel poverty definitions have a noticeable impact on the percentage of households identified as fuel-poor, as well as the time trend for fuel poverty.

In particular, the rate of low income-high cost (LIHC) fuel poverty shows very little variation over time. This is because it is a ‘relative’ metric – what constitutes high energy costs is measured relative to median energy costs.

A sharp rise in energy prices will lead to a sharp increase not only in energy costs for individual households, but also in median energy costs. As a result, the ability of the headline rate of LIHC fuel poverty to represent fluctuations in energy bills and energy affordability over time is limited.

The 10% fuel poverty metric has a time trend that shows some similarity to the relevant section of Figure 2. This is because it is based on a related ratio and, being a fixed threshold, the number of households exceeding the 10% threshold will increase as energy prices rise.

Low income-low energy efficiency (LILEE) fuel poverty shows a continuously declining trend, which is likely to be related to the average energy efficiency of dwellings increasing over time. Households in homes with a high energy efficiency rating are excluded from LILEE fuel poverty by design.

An important consideration is the extent to which the LILEE fuel poverty rate will rise with the recent increase in energy bills. Higher energy prices will result in more households being captured by the second part of the LILEE definition – that income after the deduction of required fuel costs is below the official poverty line – but this will be tempered if the proportion of energy efficient homes increases over time.

Growing numbers of energy efficient homes is especially likely if some households respond to price increases by installing energy saving technologies. It seems plausible that the increase in LILEE fuel poverty over the coming year will be lower than if fuel poverty were still measured by the 10% metric.

The takeaway: fuel poverty statistics need to be interpreted with caution

The relationship between energy bills and rates of fuel poverty all depends on the indicator being used. Policy-makers basing decisions on the fuel poverty rate need to understand the implications of the definition of the statistic that they are observing.

For example, under the LILEE indicator, someone living in an energy efficient dwelling but struggling to afford energy due to a very low income would not be identified as fuel-poor. They would simply be identified as income-poor. In contrast, using the 10% metric, the same individual could be identified as fuel-poor.

Identifying the best fuel poverty metric is likely to depend on the intended purpose. A 10% metric would be good at identifying changes in energy affordability linked to fluctuating energy prices, as we are seeing at the moment. On the other hand, the LILEE metric is reasonable for tracking the roll-out of energy efficiency upgrades in low-income households.

An alternative approach to assessing fuel poverty would be to measure energy services directly and identify the households that are dissatisfied with the services that they can afford.

For example, if a primary concern is households living in the cold, it would seem desirable to measure the temperatures achieved in homes, as well as households’ temperature preferences (Deller et al, 2021).

While such an approach would require investment in new data and methods, it would directly tie assessments of fuel poverty to households’ views of their lived experience.

Where can I find out more?

• Official English fuel poverty statistics: a comprehensive set of data and reports with lots of detailed breakdowns.
• Energy Economics special issue – Energy poverty: trends and perspectives – the latest economics research on energy (fuel) poverty from a global perspective.
• Fairness in retail energy markets? Evidence from the UK: the final report of a UK Energy Research Centre project combining economic, legal, sociological and political science perspectives.
• Ofgem data portal: a comprehensive set of charts on the functioning of British energy markets.
• National Energy Action: the leading UK charity campaigning on fuel poverty.

Who are experts on this question?

• Catherine Waddams
• Andrew Burlinson
• Stefan Bouzarovski
• Carolyn Snell
• Brenda Boardman
• Benjamin Sovacool
• Harriet Thomson

Author: David Deller

Photo by fiorigianluigi from iStock

The post How will rising UK energy bills affect fuel poverty and affordability? appeared first on Economics Observatory.

How are UK energy prices determined?

The price that we pay for electricity has to cover a range of costs. These include the costs of buying gas and electricity in wholesale markets, getting it to customers through pipes and wires, and a range of government policies that seek to help vulnerable consumers and to reduce carbon emissions.

Prices in the wholesale spot market are for next-day delivery and depend on what is happening now: as a result, they can be very volatile and affected by world events, such as the war in Ukraine. Companies can also buy in a forward market, whereby they are able to lock in prices for future delivery, months or even years ahead.

Most households are covered by price caps set by Ofgem, the industry’s regulator (explained in more detail below). But these caps rose sharply in April. For individual households, the size of their bills and the amount by which these rose depends on how much energy is consumed.

The increase in the price cap means that a household buying the ‘typical’ amount is seeing its bills rise by 54% from £1,277 a year to £1,971. Pre-payment bills are going up by £708, from £1,309 to £2,017 (Ofgem, 2022).

How does Ofgem’s price cap work?

The price cap for consumers on pre-payment meter energy tariffs was introduced in April 2017, followed by the cap on default energy tariffs (including standard variable tariffs) in January 2019. Collectively, these cover around 15 million energy consumers (Ofgem, 2020). The regulator announces the maximum amount that companies can charge in each six-month period, a couple of months before it starts.

While to date, these caps have limited costs for consumers, overall energy costs have gone up. When setting the price caps, the regulator has to predict energy suppliers’ costs, including those of buying energy over the last four months for delivery over the next 12 months.

These forward market prices essentially doubled between the summer months of 2021 used to set the price cap from October 2021 and the recent period used to set April’s new prices. The annual wholesale cost for an average household rose from £528 to £1,077.

Figure 1: Price cap components

Source: Ofgem, 2022

The cost of delivering energy has also gone up. Some gas is burned in compressors, electricity is lost as heat as it travels along the wires and there are balancing costs as power stations adjust output to keep the system stable. All these costs are linked to the price of gas.

In the autumn of 2021, many energy retailers were caught unprepared by these rising costs. Instead of buying energy in advance, they were relying on the short-term spot markets and had to pay much more than Ofgem assumed when it was setting the price cap.

More than 20 companies, with over four million customers, went bust as they did not have enough funds to cover the losses from selling energy for less than it had cost them to buy. (A company that had bought in advance from February to July 2021, the period used by Ofgem to set October’s price cap, would have been able to recover those costs.)

The failing companies included the crowd-funded People’s Energy with 350,000 customers, Pure Planet with 235,000 and Together Energy, part-owned by Warrington Council, with 176,000. Bulb, with 1.7 million customers, also needed a rescue but continued to trade under a special scheme.

The affected customers (including this author) were protected, usually when a stronger company took over their supplies. But someone has to pick up the cost of these loss-making contracts. This has been averaged over everyone covered by the price cap, and has added £68 to the April cap.

Why have wholesale prices risen?

The main driver for rising wholesale prices is the increasing cost of gas.

The UK has been a net importer of gas since 2004, and prices tend to be similar at each end of the pipelines between Bacton in Norfolk, Belgium and the Netherlands. Gas prices have been rising sharply since the middle of 2021, for several reasons.

Figure 2 shows that the European Union (EU) and Norway produced two-fifths of the gas they needed in 2019. They imported a similar amount from Russia and most of the rest came in the form of liquefied natural gas (LNG).

LNG is super-cooled and transported in large ships and as these ships can move around the world, prices in different importing regions tend to converge. Gas demand in Asia has grown faster than the supply of LNG, and lower European imports have helped to balance the market (Fulwood et al, 2022).

Figure 2: Gas supplies to the UK and EU

EU Gas Sources, 2020

UK Gas Sources, 2020

Source: BP World Energy Statistics and Digest of UK Energy Statistics

This was possible because EU gas storage was very full at the start of the winter of 2020-21, and so more gas than normal could be withdrawn over the colder months. It is normal to refill storage during the summer when gas demand is lower, but less gas than usual went into storage in the summer of 2021.

European demand was lower than in the same period in 2019 (2020 is not a good comparator year as the pandemic made energy demand very unusual), but so was local production, and by more, as Europe’s gas fields were gradually depleted.

Imports from Russia were also lower. The main supplier, Gazprom, was meeting its long-term contracts but usually sold large amounts in the short-term markets as well. By the autumn of 2021, it was becoming clear that European gas storage was much lower than normal levels for the time of year. Consequently, prices rose as companies tried to get hold of enough gas for the coming winter.

Were Gazprom’s reduced exports due to technical problems restricting its ability to supply? Was it ‘simple’ anti-competitive behaviour by a large firm attempting to push prices up, accepting fewer sales in the hope of much higher margins on the remainder? Or was it an attempt to pressure the German government into speeding up the final approvals for the Nordstream 2 gas pipeline, which runs directly from Russia to Germany?

The reasons are unclear. In any case, with less gas available, less could be put into storage, particularly by Gazprom (which owns several storage facilities within the EU).

Exports through Nordstream 2 would replace those that have gone through Ukraine, weakening that country, but the German government blocked its approval on 23 February, following Russia’s recognition of two breakaway provinces and subsequent invasion.

The other panel of Figure 2 shows that the UK produces just over the half of the gas we consume.

Imports from Norway represent a third of consumption, but the UK exports about a third of this amount (not necessarily the same molecules) to Ireland and the continent. About a fifth of our gas consumption arrives as LNG, including about 5% of consumption from Russia.

Those imports could very likely be replaced with cargoes from other countries, so the UK’s physical security of supply is hardly at risk, but we would have to pay whatever the market price turned out to be. Several EU countries are in a much more vulnerable position: they don’t have the import facilities to replace Russian supplies, and other gas exporters don’t have enough spare capacity in any case.

Figure 3: Gas spot prices

p/therm

p/kWh

Source: Ofgem and Statistics Netherlands
Note: p/kWh data missing from March 2013 to September 2017

The impact of this on prices can be seen in Figure 3, with a dramatic increase over the last few months.

There is a direct impact on gas bills, of course, and the rise also feeds into electricity prices because of the way that market works. The demand for electricity varies over the day, and between summer and winter. Generation has to match this demand from second to second, with a little help from electricity storage in batteries and pumped storage hydro stations.

In each half-hour, the owners of the most expensive stations needed to meet demand will want a price that is at least high enough to cover their costs of doing so. The owners of stations with lower operating costs won’t want to settle for much less.

Most markets are like this – sellers aim to receive the most that buyers are willing to pay, even if their costs are well below this level. The price in forward markets is based on what participants expect the spot prices to be at the time the power has to be delivered.

Figure 4: Day-ahead energy prices

p/therm

p/kWh

Source: Ofgem

Figure 4 shows that the short-term (day-ahead) gas and electricity prices do tend to move closely together. The scales are chosen to align the cost of the amount of gas that a typical power station needs to burn to generate a unit of electricity with the price received for it.

The gap between the two lines represents the cost of carbon permits – which has been gradually rising over the period – and the generators’ margin to cover their other costs.

What about the generators that don’t burn gas?

In 2021, Great Britain got 37% of its electricity from gas-fired stations, and 42% from low-carbon hydro, solar, wind and nuclear stations. An additional 7% came from burning biomass (mostly wood pellets), just 2% from coal and the rest was imported.

Nuclear stations have low variable costs, but they sell at the normal market prices, giving their owner (EDF) a windfall when they are high. A previous owner, British Energy, nearly went bankrupt in 2003 when electricity wholesale prices were low.

The older wind farms also sell at market prices and receive a subsidy as retailers have to buy ‘renewable obligation certificates’ from them as well. Renewable generators are given these certificates in proportion to their output and sell them to retailers, which have to show that a proportion of the electricity they sell comes from renewable generators.

But the newest wind farms are supported through ‘contracts for differences’, which effectively set a fixed price. Low wholesale prices are topped up, but the generators give money back when market prices are high. In the last three months of 2021, this saved electricity consumers £133 million compared with the price of buying gas-fired power.

Would fracking have helped?

Energy markets in the United States have been dramatically changed by the rise of fracking – a process that involves drilling a well horizontally (so that it passes through a lot of gas- or oil-bearing rock) and injecting high-pressure water to fracture that rock so that the gas and oil can escape.

By 2015, US gas production was 50% higher than ten years earlier, while the price had fallen by two-thirds. It has risen with the energy crisis but is still less than a quarter of levels in the UK.

Cuadrilla tried to frack wells in Lancashire, but in 2019 the government banned further attempts because of (small) earthquakes. Could restarting the process have the dramatic effects seen in the United States?

Unfortunately, it would take a long time to expand production, if it proves feasible at all. The UK’s geology is different from that in the US shale areas, in ways that make it harder to extract the gas. And the impact of extra supplies on UK gas prices won’t be like that seen in the United States, because North America is an island – in gas terms – and the UK isn’t.

The United States didn’t have the facilities to export natural gas, so their prices had to fall until it was cheap enough to burn in power stations instead of coal. This would have been a good thing for the climate, except that the United States then exported the coal.

The UK, on the other hand, is well connected to the European market. We need gas to come in from the continent during winter, which means that our wholesale prices are normally very similar to those in Belgium and beyond.

To have a significant effect on prices across all of Europe would take much more gas than the UK is likely to be able to produce. The best thing we can do in the short term is to insulate our homes more effectively and to service our boilers to make them run as efficiently as possible.

Where can I find out more?

• The EU plan to reduce Russian gas imports by two-thirds by the end of 2022: Practical realities and implications: Report from the Oxford Institute for Energy Studies.
• Default tariff cap level: 1 April 2022 to 30 September 2022: Publication from Ofgem.

Who are experts on this question?

• Richard Green
• Catherine Waddams
• David Newbery
• Dieter Helm
• Michael Pollitt

Author: Richard Green

Photo by Riverheron from iStock

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