To what extent has the current financial crisis affected people's living standards in the UK - Essay Example

Similarly, the real income remains at levels in 2002 whereas Consumer Price Inflation has risen by 25% (Croucher, 2013). This indicates the growing disparity between people’s purchasing power and the cost of commodities. Therefore, people are worse off with the increased prices and falling incomes. The commodity prices in UK have been affected largely by the current financial crisis. Prior to the financial crisis, the rapid oil price hike (including that in UK) had generated hope that the UK government would focus on renewable energy projects.

However, the oil prices stabilized following the global recession owing to falling demand for fuel (Alvarez-Ramirez et al., 2012). As a result, the prices of commodities in UK, including both direct commodities such as petroleum and indirect commodities such as food stabilized. On the contrary, prices of diamonds saw a sharp decline in 2008 which was followed by a “rebound” whereby diamond prices exceeded equilibrium levels (White & Rowley, 2013). This is referred to as a “commodity boom”.

Thereafter, in 2011 when economic activity slowed down, the commodity prices suffered a fallback from their previously high levels. Commodity exporting countries such as the UK are greatly dependent on demand from commodity importing countries and BRIC economies such as India and China. Until 2007 and the first half of 2008, commodity prices increased rapidly due to boom in demand from India and China. However, the recessionary pressures soon caused demand for fuel and other commodities to slow down in these economies (El-Gamal & Jaffe, 2010).

The international commodity demand for base metals soared with the demand for oil increasing simultaneously. This had led to an increase in food-based inflation with an increase in prices of petrol, food and other expenses. This inflation held back the Central Bank from reducing interest rates to provide financial comfort to UK citizens during the credit crunch. Furthermore, with falling economic activity and new housing construction, construction contracts by the UK government also fell significantly from 2007 to 2009 (BBC News, 2012).

This reduced the fall in demand for energy with the affect of a short-lived descent in oil prices in the UK during the period. The price of Gold, on the other hand, has been steadily rising following the recession. This is because gold has historically been viewed as a safe haven for investors to save their money during times of economic volatility. Gold boomed as stock markets collapsed and large amounts of money were printed with the dollar “floundering”. Furthermore, in the financial crisis marked by illiquidity, gold provided a highly liquid investment for investors (Shafiee & Topal, 2010).

Emerging markets have had a “worst-than-expected” demand which shows how demand has fallen drastically resulting in a fall in overall commodity prices in the UK. To conclude, the financial crash had the effect of reducing or stabilizing the prices of fuel such as oil which had a spiraling effect on the prices of other commodities. One of the biggest causes of this (as highlighted earlier) has been the falling demand of commodities from BRIC economies in the aftermath of the crisis which has put prices of commodity exporting countries such as UK on a backburner.

Furthermore, prices of gold increased due to strengthening of dollar