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Could the cost-of-living crisis be ‘coming to an end’?

Rebecca Goodman
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Rebecca Goodman

The end may be in sight for high prices and inflation as one economist has said “the cost-of-living crisis appears to be coming to an end.”

Months of increasing prices and high inflation, which has remained way above the Government’s 2% target, has put huge financial strain on households. Yet, one economic think tank believe the ‘end may be nigh’ for the crisis.

However, despite the comments from Capital Economics (CE), the firm also warns that this doesn’t mean the households “won’t suddenly stop feeling the pinch”.

Ashley Webb, UK economist for CE, said levels of real household disposable income will remain below where they were before the pandemic until early 2025.

Webb also said the firm predicts the UK will enter a mild recession later this year, as the full effect of higher interest rates, which are currently at 5.25% and expected to rise further, feed through.

When looking at how to define the crisis, Webb says a good proxy is when inflation is above average earnings growth as this means households aren’t able to buy as many things are they previously could.

Inflation rose above earnings growth in April 2022 and remained that way for 14 months but Webb says this is about to change.

“We think that CPI inflation will fall below average earnings growth in July. What’s more, our forecasts suggest that CPI inflation will remain below wage growth for the rest of this year, all of 2024 and all of 2025,” Webb said.

‘Crisis may end as soon as July this year’

However, it won’t be until the end of 2025 that the level of wages will return to the peak of December 2021. This will be a “shorter and less painful squeeze” on households than the fall of 12% in real wages seen between 2008 and 2014.

When making comparisons between the 2008 recession and today, Webb said real household disposable incomes have held up better than real wages in the most recent crisis. This is partly due to households being supported by the cost-of-living payments from the Government.

Webb added: “Overall, based on the real growth rate of earnings, the cost-of-living crisis may end as soon as July this year. But the levels of real household disposable income and real wages may not recover until 2025.

“And the economy is moving from a cost-of-living crisis to a cost-of-borrowing crunch. As such, we think the growing drag from higher interest rates will tip the economy into a mild recession later this year.”