Submitted by Bill Fernie
20th August 2026
There is a question I think we should be asking now, before the next round of household bills and business costs begin to bite. Are incomes actually keeping pace with the rising cost of the essentials we cannot avoid buying?
At first glance, the answer might appear to be yes. Wages are still increasing, the National Living Wage rose in April, and pensioners received another increase in their State Pension. Inflation is nowhere near the levels we experienced during the worst of the previous cost-of-living crisis.
But I am increasingly concerned that looking at the headline figures gives a rather misleading impression of what is happening to people's finances.
The latest figures show regular UK pay increasing by around 3.5%. That sounds reasonably healthy until we compare it with inflation and, more importantly, with the particular things that are now becoming more expensive. In real terms, regular pay growth is only providing a very small improvement in purchasing power.
That would not necessarily be a major problem if the things rising fastest were luxuries that households could choose not to buy. Unfortunately, that is not what we are seeing.
Energy and fuel are necessities. Food is a necessity. Transport is a necessity for millions of people, and particularly so in rural Scotland.
The July inflation figures provided a warning of what may be coming. CPI inflation increased from 2.6% to 2.9%, with the increase in household energy costs playing a significant role. The energy price cap rose sharply in July, and that immediately demonstrated how quickly a movement in wholesale energy costs can reach household budgets.
The danger is that this is only the beginning of the transmission process.
Energy does not exist in isolation. A haulage company uses diesel. A farmer uses fuel and electricity. A supermarket has to transport and refrigerate food. A manufacturer uses energy in production. A hotel needs to heat rooms and kitchens. A shop needs electricity. A restaurant has to pay for food deliveries as well as heating and lighting.
When energy becomes more expensive, eventually somebody has to pay for it.
Sometimes that will be the consumer through higher prices. Sometimes it will be the business through lower profits. Sometimes employees will feel it through smaller wage increases. Increasingly, I suspect we will see all three.
That is why I think the next twelve months could be considerably more uncomfortable than the headline inflation rate suggests.
There is at least one encouraging sign. Food inflation has so far remained relatively subdued. Supermarket competition is fierce and the major chains have been reluctant to allow prices to rise too quickly for fear of losing customers.
But I would not assume that means the food problem has gone away.
The Bank of England expects food inflation to move significantly higher towards the end of this year. At the same time, Britain is dealing with exceptionally dry weather and the possibility of lower agricultural production. If reduced domestic production coincides with higher fuel, transport and energy costs, the pressure on food prices could become much greater.
For households already struggling to balance their budgets, even a few percentage points matter.
There is another issue which I think is often overlooked when we discuss inflation. We talk about prices rising or falling, but we sometimes forget where prices started.
If something cost £2 before the inflation crisis and subsequently increased to £3, bringing inflation back down to 2% does not return the item to £2. It simply means the £3 price rises more slowly.
That is the reality many families are living with.
The previous inflation shock permanently lifted the price level of many everyday goods and services. We are now potentially adding another layer of increases on top of those already elevated prices.
Pay is helping, but the protection is uneven.
The National Living Wage increased by 4.1% in April to £12.71 an hour. That is significant and provides some protection for lower-paid workers.
The State Pension is also relatively well protected. It increased by 4.8% in April under the triple lock, meaning pensioners receiving the full State Pension have seen a larger increase than many employees.
But the picture is less comfortable for many other workers. Private-sector pay growth has weakened, and the labour market itself is showing signs of cooling. Vacancies have fallen substantially and payroll employment has been declining.
That matters because businesses are unlikely to offer large pay increases when they are already worried about falling demand and rising costs.
This is where the problem becomes circular.
Workers need higher wages because their household bills are rising. Businesses need to raise prices because their costs are rising. But customers cannot necessarily afford higher prices. Businesses therefore become reluctant to increase wages, while employees become increasingly reluctant to spend.
The result can be an economy that is technically growing but feels increasingly difficult for ordinary people.
For businesses in Caithness and other rural parts of Scotland, I think there is an additional problem.
We do not have the same alternatives available to people living in large cities. Public transport can be limited. Distances are greater. A car is often a necessity rather than a choice. Heating requirements can also be greater, particularly for older and less energy-efficient properties.
That means a rise in petrol, diesel or heating costs can have a much bigger impact on household finances here than the national average might suggest.
The same applies to businesses.
A Caithness business can be paying more to bring supplies north, more to send products to customers, more for heating and electricity and potentially more for employees who themselves are facing higher living costs.
There is no magic answer to that.
A business can absorb the increase, but that reduces its profitability. It can increase prices, but that risks losing customers. Or it can try to control wages and staffing, which creates another set of problems.
This is why I think the current debate about inflation needs to move beyond the monthly CPI figure.
What matters to people is not whether inflation is 2.9% or 3.2%. What matters is whether there is enough money left at the end of the month after paying for the things they cannot do without.
For some households, the answer will still be yes. For others, particularly those on fixed or relatively low incomes, the margin may already be disappearing.
And businesses face the same squeeze from the other side of the equation.
I do not think we are heading back automatically to the extraordinary inflation rates experienced during the energy crisis. There are still strong forces working in the opposite direction, including competition between retailers, relatively moderate wage growth and the possibility that energy prices eventually settle.
But I think it would be complacent to assume that the cost-of-living crisis is over simply because inflation has fallen from its previous peak.
In many ways, the next stage could be more subtle.
Instead of one enormous shock, households and businesses could face a succession of smaller increases in fuel, electricity, food, transport, insurance and other essential costs. Each one might look manageable in isolation. Together they could make a significant difference.
That is why I will be watching the relationship between wages, benefits and essential costs particularly closely over the coming year.
If pay continues to rise faster than inflation, households may gradually regain some of the purchasing power lost during the previous crisis.
But if energy and food prices begin accelerating while wage growth continues to weaken, we could find ourselves talking about the cost-of-living crisis all over again.
And for many people, it will not feel like a new crisis at all.
It will feel like the old one never really ended.
Note
Apart from running this web site I try to bring experience of looking at accounts for HMRC, time as councillor and many positions in the voluntary sector to draw together data to make a stab at what might be coming for ordinary people in respect of cost of living. - Bill Fernie