That chancellor Rishi Sunak kicked off this week’s Spring Statement with a nod to the Ukrainian resistance, is emblematic of the war’s ongoing domination of global politics.
Even prior to the Russian build-up of forces on Ukraine’s border and its subsequent invasion, Britain and much of the west was grappling with a cost of living crunch.
Food prices and energy bills have continued to rocket while inflation hit a fresh 30 year high this week. More strife is set for April, when energy price caps are raised by £693 and new tax hikes are rolled out.
A report published by left-leaning think tank the Resolution Foundation last week estimated that the regular British household’s income will fall by about £1,000 in real terms in 2022 due to inflation – the biggest drop since the 1970s.
But how will Russia’s invasion in Ukraine further hit the cost of living in the UK – and are we yet to see the worst of it?
What will Russia-Ukraine mean for energy prices?
Even before the Ukraine crisis, the UK was grappling with huge climbs in energy costs.
A cold winter in 2020 left Europe’s natural gas stocks lower than usual, and a less windy summer in 2021 meant reduced generation from renewables.
Increased energy demand across Asia, as many industries rebound from the height of the pandemic, has also exacerbated the impact of reduced supplies.
From April Ofgem has said it will permit the energy price cap to rise by 54 per cent from 1 April to 1 October.
As a result, experts estimate that the average UK household will experience a jump from £1,277 to £1,971 per year in energy bills.
Wholesale gas costs have rocketed in recent months – rising by over 500 per cent in under a year, leading 29 suppliers to go bust since August 2021, in addition to Bulb entering special administration in December.
Analysts at the Investec banking group have even warned that annual bills could rise to £3000 when the energy cap is once again reviewed in October.
While the government has announced loans of £200 to help people cover their rising energy bills, commentators such as Martin Lewis, the founder and chair of Money Saving Expert, have been vocal about such measures being inadequate.
He told the Commons’ business committee this week that: “£350 worth of help of which £200 is questionable, to cover a £1,300 rise [in energy bills]… you don’t need to be the Money Saving Expert to work out, no, that is not enough”.
While Russia only supplies 4 per cent of the UK’s gas imports, the country’s position as the second-largest gas producer and largest exporter of hydrocarbon means its activities highly influence the global market.
Although Europe has not yet risked sanctioning Russian gas exports, there is the possibility of Russia could use the reliance of EU states on n its energy exports as leverage in future negotiations. This possibility, alongside uncertainty over potential sanctions, means the market is already in freefall in anticipation of further disruption.
Just yesterday wholesale UK gas prices jumped by 18 per cent after Putin announced that Russia will only accept just Roubles as payment from “unfriendly” states in response to sanctions.
While the UK government is reportedly exploring North Sea oil and gas and even fracking as one way to increase domestic energy supply, new production could take decades to get underway.
How will the war impact petrol prices?
Fuel costs too were previously surging before the onset of war in Ukraine, and they look likely to remain high as the conflict rumbles on.
Average prices currently sit at record highs of 167.03p per litre for petrol and almost 178.97p for diesel.
The RAC Foundation estimates that the 5p cut in fuel duty announced in the chancellor’s spring statement will slash about £3 off the typical filling of a 55-litre family car. While drivers will surely welcome any price decrease at the pump, most say the measures do not go far enough.
Nicholas Lyes, RAC head of policy, has also warned that retailers may prevent customers feeling the benefit of the cut, by keeping their own prices the same.
Although the UK does not import Russian oil in any major capacity, higher international prices will hit British consumers, especially if sanctions on hydrocarbons escalate.
Russia is the world’s third-biggest oil producer, making up around 11 per cent of global exports.
Russia’s deputy prime minister Alexander Novak has warned that the benchmark per barrel price of Brent crude oil could rocket to $300- from the current average of around $120-should NATO and its allies ban Russian oil imports.
Although statements from Russian officials should always be taken with an extra grain of salt, it is clear that prices would rapidly increase should sanctions-hit hydrocarbon imports.
How could the war escalate food prices?
Food and drink prices are already on the up across the UK, however, the Russian invasion of Ukraine will only make things worse.
Both countries are major grain exporters, and Ukraine in particular is vital in global supplies of rapeseed oil and sunflower oil.
With all Ukraine’s commercial shipping suspended indefinitely there is no telling when its exports will be restored to pre-war levels, if ever.
Last year’s wheat harvest issues in Canada meant that pasta prices were already pushed up sharply, rising by 26 per cent in December 2021.
Naturally, the price of products in which rapeseed and sunflower oils are the key ingredients will likely climb, including spreadable butter substitutes and sauces.
The prices of staple purchases such as pasta and bread will therefore continue to surge across the UK and the world if current conditions persist or worsen. Prices of vital elements of the food production process, including fertiliser and animal feeds, also continue to jump as supply from Ukraine plummets. The disruption to Russia exports of raw materials including potash for fertiliser productions will also contribute to price jumps.
Issues with fertiliser manufacturing will also have a knock-on impact on CO2 gas supplies vital to the manufacture of carbonated drinks along with meat slaughter and preservation.
The UK’s relatively strong initial bounce back from Covid was driven by an uptick in household consumption. However, the unravelling of geopolitical risk following Russia’s invasion of Ukraine has already thrown a hefty spanner in the works.
The war’s long-term impacts aside, it is clear that both businesses and consumers will feel the need to curb or delay spending as prices continue to climb, and uncertainty grips the outlook for the rest of the year and beyond.
