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A cost-of-living crisis refers to a socioeconomic situation or period of high inflation where nominal wages have stagnated while there is a sharp increase in the cost of basic goods, such as food, housing, and energy. As a result, living standards are squeezed to the point that people cannot afford the standard of living that they were previously accustomed to. Public health is threatened.^[1] The population becomes poorer than it used to be in real terms. This is in contrast to a situation in which wages are rising to meet the rate of inflation and workers' standard of living remains unchanged.^[2]

As of 2023, there is a cost-of-living crisis in many countries around the world.^[3] In February 2023, 3 out of 4 consumers globally were worried about the rising cost of everyday expenses.^[4] The Big Issue defines a cost of living crisis as ‘a situation in which the cost of everyday essentials like groceries and bills are rising faster than average household incomes’.^[5] Change in average real incomes can be measured by real GNI per capita change.

Effects on society

Health

Cost-of-living crises have had significant and wide-ranging negative consequences for mental and physical well-being.^[6]

For example, high food prices force people to choose to eat foods with less nutritional value or less food in general. This leads to a higher rate of obesity (due to higher cheap carbohydrate consumption) or undernutrition, and, by extension, less energy and lowered performance at school or work. Worse nutrition also leads to a higher likelihood of getting sick from infectious diseases. In poorer countries, there is a higher risk of starvation.^[7]^[8]

Mental health also declines across the board due to the stress of being unable to afford to live properly. Rates of depression and anxiety increase. People are also more likely to lose sleep, forego meeting with friends, not engage in their hobbies, and skip out on exercising. A cost-of-living crisis will lead to a higher demand for social and health services. However, higher operating expenses and a lack of staff to meet the higher demand will result in squeezed budgets and worse service. Overworked and underpaid staff will also be more likely to quit, creating a vicious cycle.^[9]^[10]

Job market

Workers are more likely to quit their job and switch to a higher-paying one because their current job no longer pays enough to cover their lifestyle expenses.^[11] Workers are most likely to strike in an effort to improve their circumstances.^[12]

Business and investments

Small businesses will be negatively affected due to higher material and energy prices.^[13] Customers also have less purchasing power, and so will purchase fewer items from companies who do not sell essential goods.^[14]

It becomes more difficult to predict investment returns because of market volatility and uncertainty. People are also less likely to invest in businesses or the stock market because they have less disposable income.^[15]

Spending and debt

Consumer confidence drops.^[16] Non-essential spending is reduced, with luxury goods, travel and fashion seeing the greatest declines.^[17] People are more likely to take on debt in order to keep up with bills and living expenses.^[18]

By region

United Kingdom

Since late 2021, the prices for many essential goods in the United Kingdom began increasing faster than household incomes, resulting in a fall in real incomes. The phenomenon has been termed a cost-of-living crisis. This is caused in part by a rise in inflation in both the UK and the world in general, as well as the economic impact of issues such as the COVID-19 pandemic, Russia's invasion of Ukraine and Brexit. While all in the UK are affected by rising prices, it most substantially affects low-income persons. The British government has responded in various ways such as grants, tax rebates, and subsidies to electricity and gas suppliers.