There seems to be a disconnect between economists and ordinary people with ordinary finances.

The factors that are creating a cost of living crisis are clear

1. People’s ability to pay their bills is still reducing. The economists point to inflation slowing but this doesn’t mean that prices are falling, they are just not increasing so fast and wage inflation , for many, has not kept up. We continue to feel pain at the till, the pump and when we feed the meter.
2. The interest rate hikes are for many people, still abstract. Many people are still on fixed rate mortgages and the impact of interest rate changes on unsecured debt is marginal (you pay 37 or 38% on your card – who cares>)
3. The buffers built up over the pandemic are , for many, finally running out.

So the macro factors such as Brexit, Covid,  the unwinding of QE, wars and so on, may be in abstract, the cause of the problems we are feeling in our pocket, but the pain we feel is because the financial security we built up while interest rates and inflation were low , is now gone. So are the fixes on our mortgage rates and the mortgage rates of our landlords.

So while in economic terms, things may get better in 2024, in financial terms, things will get worse for ordinary people. Add to all this the impact of higher taxation from not adjusting tax thresholds and people will continue to see bank balances diminishing, debt increasing and financial security disappearing.

I expect to see people’s finances continuing to get worse in 2024 and probably through 2025 as mortgage rate rises feed through not just to homeowners but to those renting from private sector landlords.

This is why I am opposed to the full introduction of the 2017 AE reforms in the next two years. I am increasingly concerned that for many low earners, the availability of an employer contribution for the first time will provide an awful dilemma between decreasing debt and increasing saving . Reducing the AE threshold may be irresponsible  – as Bryn Davies told us at last week’s Pension PlayPen’s meeting.

There is an argument to increase AE contributions for those with higher earners and this could start in 2025 or 2026 but it will need to be phased in. The famous 12% rate of contributions in Australia is still to arrive and will have taken over 30 years to achieve. We are only 11 years into auto-enrolment.

Those who argue that we have regressed in pension provision over the past 20 years – speak from the standpoint of those who benefited from DB accrual. But these were the minority of corporate workers, while the public sector has had inclusive DB coverage, the private sector coverage was patchy and many schemes excluded large numbers on payroll.

Auto-enrolment is offering a more inclusive system and it is backed by a better state pension (at least from the watered down SERPS and the deflated OAP of the early years of the century). We are at last getting to those most financially vulnerable through pension credit (where rates of take up are increasing) but in terms of housing , section 21 no fault evictions still haunt many on low incomes and food banks continue to thrive. We are very far from being the compassionate society that the likes of Johnny Timpson campaign for.

The cost of living crisis is now

Most people who talk about the cost of living crisis as a thing, are not living it. They are commentating on other people’s problems. I am one such, my net wealth may have decreased as house prices and pension savings fall but I am very far from insolvent.

The cost of living crisis is about not being able to draw cash out of a machine, not being able to pay for the petrol that you’ve put in your car , not being able to meet the increase in rent or mortgage payments. It is not solved by taking out debt, nor increasing savings, it is solved by balancing the books. That means earning more and spending less and for many people those are very difficult to achieve.

The economists say that we may have turned the corner, investors are scrapping ideas of higher for longer and targets for inflation may well allow the BOE to tell us it is under control by the end of next year.

All of this means nothing if you are paying more for housing, fuel and groceries and taking home less in real terms because of increases in tax.

There are many who follow Steve Webb’s line that there is never a good time to increase pension deductions, but pointing to 2012 as a time of austerity, does not win that argument. The pinch from stalled wages was mitigated by lower housing costs and nugatory inflation. Austerity was a walk in the park compared with what the nation is going through today. The fact that we are technically not in recession is of no comfort to those struggling to make ends meet.

We must be very careful about the introduction of another payroll deduction from pensions, despite the need for most of us to save more. We are underestimating how much of the cost of living crisis is yet to come.