The cost of living crisis in the UK has caused a lot of stress for most people, as many are finding that they’re having less disposable income each month than they usually would. This has been caused by a variety of factors such as; inflation rising from 2.5% in July 2021, to a record high of 11% in October 2022, before going down to 4% in December 2023, energy bills having risen due to a lower supply of gas and an increase in the cost of basic necessities. Many have found their wages have not increased in line with the cost of living. In this article, we’ll look at the factors that will influence the cost of living in 2024, as well as how you can manage with increasing costs.

What is the cost of living?

The cost of living is defined as the amount of money it takes to maintain your standard of living, including basic necessities like food, bills, household utilities, transport and living expenses. Understanding an individual or household’s cost of living is key for budgeting and financial planning to help you make informed decisions for your financial future.

Understanding your own or your household’s cost of living in 2024 will allow you to make any necessary changes to yours and your families spending should inflation and costs become unsustainable. For example, if you’ve noticed certain groceries have increased in price, it may be time to switch to cheaper alternatives. Or if a certain bill has increased, understanding where your money is going can help you cut any unnecessary spending.

The cost of living can also be used as an indicator by employers to help them determine any necessary wage increases or compensation packages to ensure their employees aren’t too negatively impacted and protect their financial wellbeing. This is a key indicator for many individuals and households when seeking new employment, as well as those striking to earn a living wage.

Factors that will influence the cost of living in 2024

While each person’s cost of living will be unique to themselves and their income, there are a variety of factors and economic indicators that can influence societies cost of living in 2024 as a whole. These include; inflation rates, trends in the housing market, employment rates, consumer prices and any governmental policies that can have a direct impact.

It’s essential to note that these factors are interconnected, and changes in one can influence others. For example, if the government announced a pause on building new houses, it would increase the demand for housing, which would in turn increase the price of houses and the average cost of rent. Additionally, unexpected events and emerging trends can significantly alter the economic landscape. This was seen during the Covid-19 pandemic which caused economic uncertainty and complications in supply chains, which resulted in an increased demand and caused prices to rise.

While there will always be a certain degree of uncertainty and unpredictability, each of these factors will be monitored vigilantly throughout the year by financial forecasters and experts. Then, should there be any major geo-political events or changes to inflation or consumer prices, these indications can help predict any specific cost-of-living changes in 2024.

Inflation rates

Inflation rates measure the percentage increase of goods and services over a set period of time. When inflation rises, it results in the cost of goods and services to increase alongside it. This impacts the typical household greatly and can result in each person struggling to afford essential items that they used to afford, like groceries and energy bills. After rising to an astounding 11% in October 2022,  recent figures show the inflation rate figures has decreased to 4% in December 2023, indicating a better economic environment in the coming year and benefiting consumers by stabilising the cost of living.

Housing costs

The housing market includes a range of cost factors, from property values, rent prices and mortgage rates. Any change in one area can result in a dramatic shift in demand and costs, heavily influencing the cost of living. Rent prices directly affect monthly costs for renters, and can affect how they save for a housing deposit. 

Mortgage rates determine the cost of borrowing for potential homeowners. Both renting and home ownership can affect where someone can afford to live, further impacting monthly expenses as this could cause an increase in travel costs. Furthermore, government housing policies, such as rent control, first-time homebuyer incentives, or lending regulations, play an important role in affordability and the cost of living. Rent control would ensure a tenants main expense isn’t increasing, ensuring their home remains affordable. While a first-time homebuyer incentive like a lifetime ISA, would give someone a helping hand by giving them a 25% bonus each year up to £1000, when purchasing their first home.

Consumer prices

There are a wide range of factors that play a role in consumer prices, and to predict any changes requires vigilant analysis by financial experts. Issues involving supply chain, labour or global economic situations can cause a change in the price of consumer goods like food or clothes. Price changes to essential services such as transportation can be influenced by and are sensitive to fuel prices, labour costs and regulatory changes. While analysts continue to anticipate trends and forecast changes, an unpredicted global event, such as a natural disaster, war or pandemic can make it challenging to precisely predict consumer prices.

With everyday costs on the rise, maintaining a proper household budget can give you a sense of stability during financial uncertainty. A thorough analysis of your total household income as well as essential and optional expenses can help you find areas to cut costs, increase your savings and help cover any unexpected rise in costs to essential goods and services. Taking a proactive approach won’t just give you a sense of security, but also a sense of financial freedom to be prepared for whatever unexpected life event may come.

Income

Recently in the UK, the topic of income has been in the news due to many people, both in the public and private sector, such as junior doctors and railway staff dissatisfied that their income hasn’t kept up with inflation. Before the rise in inflation, an individual’s income could cover their cost of living, leaving some disposable income for them to save for the future. However, if their income doesn’t rise in line with inflation, everyday essentials will be eating into their disposable income, leaving them with less to save. Should someone then stop working due to illness or injury, they won’t have as much savings to fall back on. This is why income protection can provide a sense of security should you become too ill or incapacitated to work. Fortunately, the standard wage in the UK is expected to rise by up to 5% in 2024. 

How to cope with increasing costs

The escalating cost of living in the UK has brought psychological and emotional stress to a lot of people. As everyday expenses continue to rise it can have a knock-on effect on your mental health.  Increased anxiousness about meeting basic needs, mixed with the constant struggle to make ends meet, can lead to heightened stress levels. This could then spill into other aspects of life, impacting your overall happiness or relationships with others. This is why it’s crucial to recognize and address the psychological toll that increasing costs can have, and the need to take care of your mental health and overall well-being.

Improve money management

During a financial crisis, proper money management is key to remaining afloat, protecting your mental health and setting healthy financial goals for the future. At times of economic uncertainty, whether it’s a recession, an unexpected life event, or a global crisis, life can sometimes cause us to re-evaluate our money management. Having a complete overview of your total monthly budget, keeping track of all of your income, as well as your total bills, utilities, and overall expenses will allow you to cut out any unnecessary spending and let you evaluate where to find more cost-effective solutions.

Improve financial resilience

Financial resilience is the ability to bounce back and recover from times of economic uncertainty, without compromising your long-term financial stability. Becoming more financially resilient involves creating a healthy monthly budget, creating an emergency fund, diversifying your investments and creating a financial strategy to assess your long-term financial goals. While these savings strategies can protect your finances during a time of economic uncertainty, it’s also important to stay well-informed about changes in inflation, the housing market and other financial trends. Acknowledging and addressing any potential risks to your personal finances, will help you become more financially resilient and adapt your savings and spending in the future should you need to.

Improve saving habits

From Covid-19 to the rise in inflation, economic uncertainty has been at the forefront of our minds in recent years. Due to this, saving is now more important than ever. Even if you’ve been preparing for a rainy day, life has shown that the unexpected can happen and improving your saving habits can make a big difference. If you want to save without noticing a big difference in your monthly spending, try a money saving challenge, where you can save some money over a year, just by putting aside a small amount each day. You can also invest in a Shepherds Friendly Stocks and Shares ISA from just £30 a month. We aim to provide you with higher returns in the medium to long-term, compared with what you’d get from a bank or building society cash savings account. However, this isn’t guaranteed. Remember, when you invest your capital is at risk.

In summary, there are a range of factors that can influence the cost of living in 2024. From inflation rates, housing market trends, consumer prices and the impact of governmental policies. Some can be anticipated, if you or an experienced financial analyst has been keeping a close eye on recent economic changes, new government legislation or events covered in the news, these changes may be easy to predict. Should a negative change in the cost of living arise, it may be the time to re-evaluate your monthly budget and remove money from your emergency fund to cover the rise in costs. On the other hand, should you find your monthly cost of living going down, from a decrease in inflation or a decrease in consumer prices, it would be a great opportunity to become more financially resilient. Whether that’s by creating an emergency fund, or by investing in a savings plan for your financial future.