How advisers can steer a path to help clients navigate the cost of living crisis

by | Jun 13, 2022

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In this blog for IFA Magazine, Nitesh Patel, Strategic Economist at Yorkshire Building Society, explores the consequences of the cost of living crisis and shares his advice for how advisers can help clients manage this challenging time.

There is now little doubt left in anyone’s mind that we are living through what can only be described as unprecedented times. Indeed, one crisis has seemingly followed another and after the shock of the coronavirus pandemic, we are now faced with the cost of living crisis – which, whilst undoubtedly different is nature, is as far-reaching in effect.

With food, energy and transport prices continuing to rise, inflation is currently at 9pc and is predicted to reach double figures in the not so distant future, with a strong likelihood of yet another increase in the energy price cap due in October. This, in turn, is taking an increasingly clear toll on consumers and their finances across the board.

Indeed, the cost of living crisis is an issue that will be directly affecting every single household in the country, whether better off or less well off – albeit in different ways, it affects us all. As advisers it is important to remember the increasing pressure clients will be facing as the situation develops as well as, of course, to take action where possible to mitigate the impact.

 
 

So how exactly are people feeling about the cost of living crisis and what impact is it having?

According to our Inflation Nation report, three-quarters of people believe the cost of living crisis will have a negative impact on their finances[1].

It isn’t hard to understand why. Growth in earnings is not keeping up with price inflation and on top of that there have been increases in National Insurance contributions. Whilst the Bank of England has now raised interest rates four times in a row to combat high levels of inflation, this has adverse effects elsewhere – driving up the cost of borrowing, for example. With 80% of outstanding mortgage stock on a fixed rate, the effect of the rate hikes will not be immediate for most mortgage borrowers – but they will feel the pinch when their current mortgage deal comes to an end.

 

The dual effect of reduced saving capabilities, due to increased costs, and more expensive borrowing, due to increased interest rates, paints a somewhat bleak picture.

Whilst UK Finance’s most recent Household Finance Review suggests consumer confidence has taken a blow in the first few months of 2022, it appears not all is lost. Our Inflation Nation report found that 66% of people said the effects of the cost of living crisis would be temporary – but nonetheless remained concerned about how current price inflation would affect their lives.

Taken in the context of other numbers the Inflation Nation report reveals, that one in five (17%) of people have no savings to fall back on, while a further 15% have just under £500 – the truth is that, for many, no matter how short-lived the crisis might be, the impact could be serious and far-reaching.

 
 

For those with the savings, the rising cost of living has already forced nearly four in ten (39%) to dip into their savings in the last 12 months – with almost a quarter of those savers (23%) saying they had dipped into their savings by between £200 and £499, while more than one in ten (12%) said they had done so by between £500 and £999. Almost a fifth (17%) said they had dipped into their savings by over £1,000.

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