What Is Causing the Cost of Living Crisis?

Toward Relief: Policy Solutions and Future Trajectories

With the cost-of-living crisis still unfolding, attention is turning to what can be done to resolve it and prevent a recurrence. Solutions span immediate policy fixes and deeper structural reforms. While there is no quick single cure – especially for a problem driven by diverse factors – a combination of measures could gradually alleviate the pressure on households. In this final section, we consider the policy trajectories in play and on the horizon, and what outcomes they might lead to in the U.S., U.K., and EU. We also acknowledge the balancing act policymakers face: addressing cost-of-living concerns without undermining economic growth or fiscal stability.

Taming inflation is the prerequisite for lasting relief. Here, central banks will continue to play a critical role. As of late 2025, inflation has moderated from its peak, but remains above targets in some places (e.g., U.K. ~3.8% vs 2% goal). Central banks like the Fed, BoE, and ECB are cautiously assessing whether further rate hikes are needed or if they can hold steady. The ideal outcome is a “soft landing” – inflation returns to ~2% without a deep recession. The U.S. was close to achieving this by 2024. If that success holds, it offers a playbook: withdraw excess stimulus, let supply conditions normalize, and be willing to act against emerging price pressures (but also not overreact to one-off shocks). For Europe, energy price volatility remains a risk – but if they diversify energy and perhaps implement smarter buffer mechanisms (like strategic gas reserves, joint purchasing agreements), they can reduce the inflationary impact of future shocks. In any case, bringing inflation fully to heel likely means interest rates staying relatively high for a while (compared to the ultra-low 2010s). This itself creates a cost-of-living strain (higher borrowing costs), but those are somewhat more discretionary (not everyone has to buy a house or car at a given time, whereas everyone must eat and heat). Over time, stable prices are a foundation for real income growth.

Targeted support and social safety nets: In the short run, governments are likely to maintain or refine targeted assistance to the most vulnerable. For example, Britain has already extended cost-of-living payments for vulnerable groups into 2024. There’s discussion of more permanently indexing welfare benefits and pensions to inflation properly each year (the U.K. did do a near 10% rise for most benefits in April 2023 after pressure). Strengthening safety nets could include raising benefit levels (e.g., unemployment, disability, child benefits) to more adequate standards relative to living costs. That Oxfam case study showed poorest households lost the most from austerity-era cuts – reversing some of those could ameliorate poverty. The trade-off is budgetary: doing so costs money and may require higher taxes or reallocated spending.

Wage growth and labor empowerment: A sustainable resolution means wages need to rise in real terms. Governments can foster this by supporting policies that boost worker bargaining power and productivity. For instance:

• Minimum wages: Many countries are now making bold increases. The U.K. aims to raise the National Living Wage to two-thirds of median income by 2024. The EU agreed on a framework to ensure adequate minimum wages. These can lift the floor for the lowest-paid.
• Collective bargaining: Some suggest expanding sectoral bargaining (industry-wide wage agreements) to help systematically raise pay and reduce inequality. Countries with coordinated wage bargaining (like some in Europe) often have better wage growth alignment with productivity.
• Full employment commitment: Keeping labor markets tight tends to drive broader wage gains. The Roosevelt Institute urges treating full employment as a policy priority, not an afterthought. This means not reflexively slamming the brakes via policy at the first sign of wage growth – a delicate balance with inflation control. But if inflation is supply-side and profit-driven, allowing employment to stay high while addressing those other factors could yield wage catch-up without a spiral.
• Skills and productivity: Over the longer run, the best way to raise real wages is through higher productivity (more output per worker, allowing higher pay without higher prices). That calls for investments in education, job training, technology, and infrastructure. Governments are indeed pivoting to industrial strategies: e.g., the U.S. CHIPS Act and IRA aim to boost manufacturing and green tech jobs; the EU’s NextGenerationEU invests in digital and green transitions. If executed well, these could create better-paying jobs and lower certain costs (like renewable energy becoming cheaper than fossil fuels eventually, or more efficient logistics lowering goods costs).

Housing and rent reforms: To tackle housing inflation, many proposals are on the table:

• Boost housing supply: Governments could launch major housebuilding programs, or incentivize private building, particularly of affordable housing. E.g., relaxing zoning, investing in social housing, converting unused offices to apartments – all could increase supply. However, as some analysts caution, pure supply increases take time and may not quickly reverse price trends if speculative demand remains high.
• Curb speculative investment: As the UCL report recommended, policy changes to reduce housing as an investment asset are key. This could include property tax reforms (like taxing second homes or rental properties more, implementing annual value-based property taxes to make hoarding houses costly), restricting purchase of homes by institutional investors or foreign buyers in certain markets, and tightening mortgage lending for buy-to-let. The report also suggested giving first-time buyers advantages (like compulsory mortgage insurance and long fixed-rate terms for them) and giving local authorities first refusal to buy properties for social rent.
• Rent control or stabilization: In some places, there’s momentum for stronger tenant protections, like rent increase caps (several U.S. cities and European countries have experimented with rent controls or limits on increases). Done carefully (to not deter new supply too much), these can provide immediate relief to renters. Berlin tried a rent freeze (later overturned by courts), and Sweden and others have long had stringent rent control – though it often results in reduced rental supply or black markets. A middle path might be limiting rent hikes to inflation or a fixed percent per year for existing tenants.
• Household support: In the shorter term, housing benefit or rent assistance could be expanded to ensure low-income families don’t get evicted or homeless due to rent spikes. Some countries boosted these during COVID; continuing enhanced support might be needed until rents moderate.

Energy and food resilience: Energy costs were a catalyst; preventing a repeat means accelerating the energy transition and energy security:

• Renewable energy and efficiency: Many governments have reaffirmed or raised clean energy targets since reliance on imported fossil fuels proved risky. The EU’s REPowerEU plan, for example, seeks to drastically cut Russian gas reliance by upping renewables and efficiency. Over time, more renewables mean cheaper electricity (wind/solar are now often cheaper per kWh than gas), insulating consumers from global fuel swings. Also, home insulation and efficiency retrofits (which some countries are subsidizing) can permanently lower heating bills for households.
• Energy market reforms: Some suggest creating strategic reserves not just for oil (which many have) but for gas and critical minerals – like the Roosevelt Institute idea of a “Strategic Resilience Reserve” to buffer prices of essentials including energy and even food. Essentially, government could buy/sell to stabilize prices (like how the U.S. used the petroleum reserve to curb gasoline prices). It’s a form of market intervention aimed at preventing extreme volatility.
• Food supply: To address food price volatility, strategies include securing domestic food production (though protectionism can also raise costs) and maintaining emergency grain reserves. International coordination to avoid export bans in crises (which worsened price spikes) is also being discussed. Some countries cut VAT or tariffs on staple foods temporarily to ease prices; in longer term, ensuring competitive supply chains and cracking down on any price-fixing in food distribution is key.
• Climate adaptation: Interestingly, climate-related investments (in drought-resistant agriculture, for instance) are part of preventing cost-of-living pressures, since climate disasters can drive up food prices. So adaptation and mitigation, while expensive, may save consumers money in the long run by avoiding scarcity-driven inflation.

Corporate accountability and competition: To rein in the profit-driven aspect of inflation:

• Stronger antitrust enforcement: Governments could more aggressively break up monopolies or prevent anti-competitive mergers, fostering more competition so companies are less able to jack up prices with impunity. For example, scrutinizing sectors like meatpacking, ocean shipping, tech, etc. – any concentrated sector – and pursuing actions to increase competition or regulate pricing practices.
• Price gouging laws: Some jurisdictions introduced or enforced laws against excessive price increases during emergencies (often these exist for things like disaster times). Broadening such concepts to periods of economic stress could deter the worst corporate excesses. The challenge is defining “excessive” price hikes outside of clear emergencies. Nonetheless, the discussion is there: e.g., proposals in U.S. Congress to penalize companies for raising prices beyond cost increases by a certain margin during the pandemic (though they didn’t pass).
• Transparency and moral suasion: The political pressure on companies – calling them out for “greedflation” – can itself sometimes cause corporations to temper increases to avoid reputational damage or invite regulatory wrath. For instance, the Biden administration convened meetings with oil executives in 2022 urging them to increase production and not exploit the situation. In Europe, some governments made deals with retailers to have “anti-inflation” baskets of goods sold at lower margins (France did a voluntary quarter-long initiative like this in 2023). Mexico’s basic basket agreement (capping certain food prices via a pact with companies) was cited as a model. These rely on voluntary cooperation but can buy time.
• Windfall profit taxes and redistribution: If companies do reap outsized profits from crises, taxing a portion of those and redistributing to consumers in need can be part of the solution (as was done with energy profits). It’s a way to even out the outcomes of a shock, making it less rewarding to profit excessively off consumers.

Fiscal policy adjustments: Government budgets may need rebalancing to fund relief and investment. Some possibilities:

• Higher taxes on the wealthy or certain sectors: E.g., an excess profits tax beyond energy – perhaps temporary surcharges on sectors that did unusually well. Or generally higher capital gains, wealth, or top-income taxes, to both raise revenue and address inequality. That revenue can fund expanded welfare, subsidies, or reduce other taxes (like consumption taxes) that burden the masses.
• Reallocating spending: Prioritizing cost-of-living-related spending (like subsidies for childcare, healthcare, education) by cutting or deferring less urgent expenditures. Post-pandemic budgets are tight with high debt, so tough choices loom. Europe loosened deficit rules during COVID and the energy crisis, but will gradually tighten them again – so governments will have to weigh spending priorities. However, cutting support too soon could be self-defeating if it leads to more economic pain.
• International cooperation: There have been calls, for example, to coordinate on something like an OPEC for consumers – e.g., jointly releasing strategic reserves or purchasing energy in bulk to bargain prices (the EU is doing some joint gas purchasing). Also, keeping trade open for essential goods helps: not resorting to export bans or hoarding that exacerbate global prices.

Sector-specific reforms:

• Childcare: Many countries are now seizing on childcare as both an economic and social win. The U.K. expanding free childcare hours was one step; the U.S., in the stalled Build Back Better bill, had proposals to cap childcare costs at 7% of income for most families (which didn’t pass, but may return in discussions). Canada rolled out a plan to create $10-a-day childcare nationwide by 2026, already cutting fees by 50%. If these initiatives go forward, they will significantly ease young families’ burdens and enable more parents to work (boosting labor supply).
• Healthcare: In the U.S., measures to lower prescription drug prices (allowing Medicare negotiation for some drugs from 2026) are underway. There’s also debate on hospital pricing transparency and potential controls on excessive medical billing. Any success here directly relieves a major strain. European countries, grappling with budget pressures on healthcare, will try to maintain universal coverage so that people aren’t hit with big out-of-pocket costs. The U.K.’s NHS is under strain, but the solution being floated is more funding and reform, not shifting costs to users (which would worsen cost-of-living).
• Education costs: Some relief came via student loan pauses or forgiveness (Biden’s big forgiveness was struck down legally, but he’s trying smaller targeted reliefs). Future discussions might include making colleges more affordable through increased grants or free college proposals, which would help younger generations avoid crippling debt.

Long-term structural shifts: The crisis has been a wake-up call. If we look forward 5-10 years:

• Economies might become somewhat less globalized, more resilient – e.g., “friendshoring” critical supply chains to reliable partners, even if it costs more, to avoid huge swings. This might mean slightly higher baseline costs but fewer catastrophic shortages.
• The energy transition could, after an initial investment hump, produce more stable or lower energy prices (sun and wind aren’t subject to geopolitical whims like oil/gas are). It also reduces exposure to fossil fuel inflation.
• Digitalization and automation could lower costs of some services (e.g., telehealth cheaper than in-person, or remote work reducing commuting costs). But they also can displace jobs, so needs to be managed such that productivity gains translate into broadly shared cost-of-living benefits, not just higher profits.
• If housing policy successfully boosts supply or curbs speculation, we might see real estate prices growing more in line with incomes, making housing gradually more affordable (or at least not increasingly unaffordable).
• Perhaps an increased role for government in providing or regulating essentials: some talk of the need for “universal basic services” – ensuring free or low-cost provision of basics like public transport, internet, energy allowances, etc. While ambitious, elements of this could emerge.

Possible outcomes:

• In an optimistic scenario, by the late 2020s inflation is back to ~2%, wages have risen above pre-crisis trend (catching up lost ground), and key costs like energy and housing are stabilizing due to reforms. Real incomes would then be growing again, alleviating the crisis. People might look back at 2021–2023 as a rough patch but one that spurred useful changes (like better energy security, more childcare support, etc.).
• In a pessimistic scenario, inflation could prove sticky or spike again (e.g., another oil shock or geopolitical conflict), central banks might induce a recession, and policy paralysis or austerity could return, causing a stagflation or extended wage pain. That would prolong the cost-of-living crisis and possibly lead to more extreme political changes (public losing faith in mainstream solutions).
• Another concern is the redistribution of pain: thus far, policy has shielded some and passed costs around (e.g., governments taking on debt to cap prices, effectively passing some cost to taxpayers/future). Ultimately, someone pays – the aim is to distribute it fairly and avoid those least able bearing the most. If that’s mishandled, social trust erodes.

At this juncture, there is cautious optimism that the worst inflation is past. The immediate emergency measures (energy price guarantees, etc.) are winding down as market prices ease. The focus is shifting from crisis firefighting to cost-of-living reform and recovery: how to make sure as economies grow again, the gains translate to improved living standards and not just higher corporate profits or asset prices. The political momentum suggests that ignoring cost-of-living issues is no longer viable for any party – we’ve seen a consensus across ideologies on things like needing to boost domestic production of essentials, to invest in people, and to ensure safety nets are there in emergencies.

In conclusion, while the cost-of-living crisis has been painful, it is driving a re-examination of economic priorities. Issues once considered private burdens – like childcare or housing – are now recognized as broad policy challenges that require collective solutions. Should policymakers seize this moment to enact meaningful reforms, the nations could emerge more resilient and equitable. Solutions such as those discussed – from better wages and social supports to more stable energy and housing markets – will not only help resolve the current crisis but also put us on a path where future generations are less likely to face such a severe squeeze. The trajectory is not set in stone, but the reforms undertaken in the next few years will determine whether we truly solve “what is causing the cost-of-living crisis” – and ensure that living standards can once again steadily improve in the U.S., U.K., and EU, even as those economies adapt to a changing global landscape.