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Record-breaking temperatures in the UK this week highlight the danger posed by climate change. And the fires spreading across Europe warn of the steep environmental and economic costs that lie ahead, all while people battle to stay afloat amid the escalating cost of living crisis.

Newsletter from Friday 22 July

On Tuesday, the temperature reached 40.3°C in Coningsby, Lincolnshire. This made it the hottest day ever recorded in England, and the latest peak in an alarming upward trend. According to the Met Office, nine of the ten warmest days ever recorded in the UK have been since 1990.

Even as the sun set, it barely cooled down. Provisional data suggest that from Monday into Tuesday the country experienced its hottest night on record, with parts of the East of England remaining above 25°C from dusk until dawn.

Such extreme heat poses serious dangers, not only to people but to animals, plants and infrastructure. This week zoos were closed, trees burst into flames and several train services were cancelled for fear that the metal in the tracks would warp and buckle under the blistering sun.

As fires erupted across the UK and continental Europe, emergency services were put under substantial pressure. On Tuesday the London Fire Brigade were called out to over 2,600 incidents, making it their busiest day since the Second World War. In Gironde, in south-west France, tens of thousands of people have been evacuated from their homes as nearby forests burn.

Further afield, temperatures also rose above 40°C in North America, the Middle East and Asia. Looking at the global data, Steve Pawson, Chief of the Global Modelling and Assimilation Office at NASA, concluded that the recent record-breaking heat is ‘another clear indicator… that human activity is causing weather extremes that impact our living conditions’. The latest global heatwave is a dangerous backward step for mankind.

Extreme weather costs

These extreme weather events also have significant economic costs, as highlighted in an Economics Observatory article by Ilan Noy (Te Herenga Waka - Victoria University of Wellington). The piece – first posted as part of our COP26 collection – explores how economists calculate the costs of extreme weather. He argues that the true economic impact of these disasters, and their effects on equality, are being underestimated. This means economists and policy-makers may also be misjudging the urgency required to implement cost-effective mitigation policies.

A particularly alarming chart from the article plots the first full-flowering day of cherry blossom in Kyoto over time (see Figure 1). Using data running back over a millennium, the graphic highlights how the trees are coming into flower earlier and earlier each year, particularly since 1900. In 2021, the trees blossomed on 26 March. This is the earliest they have done so in more than 1,200 years.

Figure 1: First full-flowering day of the cherry blossom in Kyoto, Japan

Source: NOAA, based on Aono, Kazui, 2008; Aono, Saito, 2010; and Aono, 2012

People face different levels of risk from extreme weather events. For Ilan, climate change ‘is not an equal opportunity menace’. In fact, its impact on minority and low-income families is potentially much higher. It is the poorest in society that are most vulnerable to floods, fires and freak events. This makes combatting climate change a social justice issue as well as an environmental one. Stopping its effects is the only way to ensure equal economic opportunities, as well as basic security, for millions of people around the world.

The numbers behind the crisis

The increasing cost of living is another crisis from which there is little respite. Prices are continuing to rise, as shown by new data from the Office for National Statistics (ONS) released this week.

Inflation rates in the UK have reached levels not seen for decades, with the consumer prices index (CPI) up 9.4% over the past year (see Figure 2). Wages are failing to keep up – as data released on Tuesday show – meaning that British workers are witnessing the value of their real-term pay shrink drastically.

Figure 2: CPI (1988-2022)

Source: ONS

But what is actually causing the crisis? Economics Observatory Director, Richard Davies, has dug deeper into the data, exploring which products are causing the biggest surge in people’s day-to-day living costs.

To understand what’s going on, it’s important to consider how measures like CPI are calculated – something discussed in detail in a recent Observatory article by Jason Lennard (LSE) and Ryland Thomas (Bank of England).

In his article this week, Richard highlights how the numbers that underpin the ONS’s findings – known as the ‘micro data’ – are the individual prices collected in shops and businesses up and down the country. This dataset is huge, with over 40 million prices recorded since 1988, which allows economists and policy-makers to take a closer look at how, and why, inflation is surging.

In normal times, there is substantial flux in the data. This means that even when headline inflation is rising, there are some shops or businesses that are cutting their prices. In short, prices tend to ebb and flow, overall.

But Richard shows that recently the shares of prices rising and falling have diverged (see Figure 3). This means there are fewer price cuts taking place, demonstrating just how widespread the current inflation facing the country has become.

Figure 3: Month-on-month price changes

Source: ONS; Davies, 2022

Worse still, it is food items that dominate the list of prices that are rising. According to the micro-data, milk, spaghetti, baked beans, salmon fillets, bacon, lettuce, cucumbers and eggs are all increasing in cost. Normally these are exactly the type of items that see a great deal of flux. But with price cuts very rare at present, these price jumps look likely to become ‘locked in’.

The competition heats up

Whoever takes over from Boris Johnson as prime minister in September will face tough policy challenges. Climate change and extreme weather events will continue to pose significant risks to people’s economic and physical wellbeing. The cost of living crisis looks set to deepen, with the Bank of England predicting that inflation could reach 11% before the end of the year. And a struggling NHS, the war in Ukraine and a battered education system will also each require urgent and sustained attention.

High inflation is not just squeezing ordinary people at checkouts and petrol pumps. New data released on Thursday show that the country’s public finances are under substantial strain, with interest payments paid by the government hitting £19.4 billion in June. This level of debt burden is largely a result of higher inflation, as the rate paid on government bonds is linked to the retail prices index, which hit 11.8% in June.

The two remaining leadership hopefuls, Rishi Sunak and Liz Truss, have each made claims that they are the most well-equipped to manage to country’s economic policies. At the centre of both their campaigns are promises to fight inflation while promoting growth. Although they differ on the nature and timings of tax cuts, both candidates are trying to convince Conservative party members that they are ready to make the difficult calls and restore the party’s tarnished reputation.

Addressing the manifold and connected economic challenges seems likely to make or break the UK’s next leader. Controlling inflation and servicing the country’s swelling debt, all while appeasing calls to cut taxes, will be extremely difficult. Getting the balance right will be critical.

Observatory news

This will be our last newsletter for a couple of weeks. We will be back on Friday 19 August. In the meantime, keep an eye out for some exciting announcements for the autumn.

Author: Charlie Meyrick
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