- The cost-of-living crisis kicked off in earnest in August 2021 with a spike in inflation to 3.2%
- Since then, markets and the economy have dealt with persistent inflation, higher interest rates and geopolitical uncertainty
- What has five years of the cost-of-living crisis meant for equity and bond markets?
- Who are the market winners and losers of the crisis
Danni Hewson, head of financial analysis at AJ Bell, comments:
“We’re now five years into the cost-of-living crisis that kicked off back in the summer of 2021. While inflation has cooled from its 2022 double figure peak, the impact of those higher prices continues to hit consumers and businesses, and fluctuating energy prices mean inflation is still a live concern for financial markets and the economy.
“Investors have continued to navigate the same challenges over the past five years, but to understand where we are now it’s worth looking back at how we got here.
“Inflation had already begun to tick up even before Russia invaded Ukraine in 2022. Pandemic lockdowns forced the global economy to a near standstill, but as vaccines were distributed and businesses found ways to reopen, demand for energy, goods and services exploded. That demand surged faster than supply could cope with, as global shipping routes struggled to recover and shortages fuelled early price hikes.
“By February 2022 inflation had already jumped from ultra-low 0.4% to 6.2% in just 12 months. ‘Transitory’ and ‘temporary’ were words well used by central bankers to describe those early price pressures, but events of February 2022 and beyond quickly changed the tenor of rate setter discussions.
“The price of oil shot up within days of Russia’s invasion of Ukraine, as western governments implemented sanctions and Brent crude reached a high of almost $140 a barrel. This immediately impacted the price at the pump and the cost of making and transporting a myriad of goods.
“But for the UK the real challenge was the surge in the wholesale price of gas, which hit a sustained peak in August 2022. The new Liz Truss government was forced to come up with the ‘Energy Price Guarantee’ that capped a typical dual energy bill at £2,500.
“Even with that intervention inflation surged to a high of 11.1%, taking almost a year and a half before it finally fell back to the Bank of England’s 2% target. But that wasn’t quite the end of the story, as measures announced by former chancellor Rachel Reeves in her 2024 Budget heaped extra costs on employers and those costs gradually filtered through to the end consumer, adding to pressure on prices. CPI edged back up to a peak of 3.8% by summer 2025.
“Conversely, measures to reduce energy bills brought in at Rachel Reeves’ second Budget eased the impact of energy price hikes in the months immediately following the start of the Iran war in late February 2026. Although the price of fuel has fluctuated wildly and shipping routes have been disrupted, the global economy has proved remarkably resilient this year.
“Despite continued sluggish UK growth, a weak labour market and appropriately hawkish noises from the Bank of England, fears of another major inflation spike have so far been dodged.
Key moments that could have changed things
“Central bankers have come in for a great deal of criticism that they didn’t react quickly enough to post-pandemic inflation, believing it would fizzle out as quickly as it ignited.
“By the time the Bank of England hiked interest rates in December 2021, UK headline inflation had already reached 5.4%. Without Russia’s invasion of Ukraine in early 2022, it is possible that CPI would have peaked much earlier and at a much lower rate than it ultimately did.
“Similarly, the increased taxes levelled on businesses in April 2025 ratcheted up cost pressures just as the economy was starting to recover, even if elevated labour costs did also contribute to weakness in the jobs market – which is one of the levers that has prevented the current bout of inflation becoming embedded in the fabric of the UK economy.
“It is equally arguable that without Donald Trump’s decision to escalate tension in the Middle East, the Bank’s 2% target may have been realised this spring, and interest rates would have continued their downward trajectory, potentially hitting 3.25% or even 3% by this summer.
What could happen next?
“Predicting the path of inflation during such a period of global instability is a bit like trying to discern a recognisable image in a bathroom mirror obscured by steam.
“Oil prices have remained elevated and volatile, but businesses have adapted, ramping up supplies and changing shipping plans. That suggests that even if the Iran war lasts into the autumn, early concerns about massive oil shortages could fail to materialise, unless the conflict takes an unexpected turn.
“The long hot summer is a concern, particularly when it comes to food prices, and the weather could also play a part in energy costs if the winter is especially cold and demand spikes. The Bank of England’s latest forecast has inflation peaking around 3.5% later this year, but there is ample time for that figure to shift in either direction depending on how geopolitics shakes out and how the UK consumer feels as we head into the winter.
“There have been signs that the UK economy is picking up, but with a long countdown to new chancellor John Healey’s first Budget that momentum could be squashed like a bug and consumer confidence along with it.”
The impact on markets
Dan Coatsworth, head of markets at AJ Bell, comments:
What it has meant for equities
“The cost-of-living crisis wasn’t restricted to the UK – it was a global event. The combination of a post-pandemic economic revitalisation and energy and food supply shock from Russia’s invasion of Ukraine caused a massive inflation spike. This had significant implications for financial markets, prompting a massive repricing of risk assets and major changes to interest rate expectations. It caused markets to shift in a completely different direction and led to investor portfolio changes galore.
“The inflation spike had serious implications for profit margins, with not every company able to pass on all the extra input costs to their end customer. In such a situation, cost pressures on businesses and consumers typically mean less money will be spent, hence why analysts took the knife to corporate earnings forecasts.
“The S&P 500 saw the biggest downgrade to 12-month forward earnings forecasts since the Covid pandemic, with a 7% cut between June 2022 and March 2023, according to LSEG data. Twelve-month forward earnings forecasts for the FTSE 100 were slashed by 13% between October 2022 and August 2023.
“US and UK markets suffered a double hit as there was an equity derating alongside reduced earnings forecasts. One popular valuation metric is the price to earnings (PE) ratio, which effectively shows the multiple of earnings an investor is prepared to pay for a stock. A derating means that investors become less willing to pay up for stocks in general, often seeing premium rated stocks hit the hardest.
“The S&P’s 12-month forward PE ratio fell by 27% in the first half of 2022 to 15.8 – a far cry from the 20+ level at which investors have generally paid for the American stock index. The FTSE 100’s forward PE went from 12.5 in January 2022 to 8.6 in October that year, a 31% decline. Those are serious deratings, helping to explain why a prior stock market rally was stopped in its tracks on both sides of the Atlantic.
“Despite the UK’s more severe derating, the FTSE 100 held up better than the S&P in the early part of the cost-of-living crisis. That was down to its greater exposure to energy and mining companies which typically benefit from higher inflation, and those sectors were already trading on low multiples due to having unpredictable earnings. The UK also has less exposure to expensive technology stocks than the US which worked in its favour.
“The biggest losers as inflation soared were long-duration growth stocks including tech names; housebuilders and property which were less appealing when interest rates shot up; and consumer discretionary names.
“In addition to commodity producers, the winners were banks for attractive dividends; value stocks; and defensive-style companies whose goods and services are needed no matter what’s happening in the world.
“As is typical with investing, crises in the moment feel like the end of the world, but markets soon move on. Investors are often quick to adapt and accept changes as ‘the new norm’, switching their attention to what could happen in the future or finding something else to latch on to. In the US, it was the dominance of the Magnificent Seven group of stocks closely followed by the AI revolution that powered an impressive market rally.
“The UK was slower to rebound but helping the cause was a spate of takeovers which highlighted the value on offer. That was followed up by a surge in the gold price and a boom in defence spending, both of which are well represented by companies on the UK stock market.
“Inflation fears came back to haunt the market this year when the Iran war triggered a sharp increase in the price of oil. However, markets seem to be confident this conflict will eventually be resolved, hence why both US and UK equities have pressed ahead.”
Source: LSEG
How it changed the world of bonds
“Rising inflation causes a headache for the bond market. The central bank playbook when inflation shoots higher is to raise interest rates, and that’s exactly what happened in 2022 and 2023. Bond yields typically go up when rate expectations increase, and bond prices fall at the same time.
“Normally one might expect bond markets to act as a cushion when equity markets stall or fall, but the opposite happened in 2022. Rising inflation eroded the real value of future bond payments, leading fixed income investors to sell existing bonds and buy new ones issued at a higher yield.
“In the UK specifically, the ill-fated mini-Budget during Liz Truss’s short-lived tenure as prime minister also caused a shock on bond markets as investors balked at then-chancellor Kwasi Kwarteng’s growth plan which was stuffed with unfunded tax cuts and increased borrowing.
“Fundamentally, bonds failed to provide the safety cushion in the early stages of the cost-of-living crisis that many people expected of them.
“Bond markets began to settle down from 2023, albeit there have been more bumps in the road recently caused by jitters around political decisions on both sides of the Atlantic, and the recent oil price spike on fears of Middle East supply disruptions.
“The trials and tribulations of the past five years have been an important reminder to diversify investments and not bet the house on one area or asset class.”
Source: LSEG