Lucy, who is a nurse from Frome in Somerset, says she is very worried and that it is "difficult to comprehend things getting even tighter" in terms of her finances.

Speaking on BBC Radio 5 Live’s Nicky Campbell programme she explained she had cut back on things like going for coffee to help make ends meet.

But despite reducing her spending, Lucy said she was already in the overdraft of her bank account with 21 days until payday, after necessary bills and purchases ate up her regular income.

"At least in a way I’m not missing payments or I can’t pay for my energy or my mortgage at the moment, but yeah it is really tough", she said.

Image source, Getty Images

Lots of you have been searching for a definition for this term.

It means an unwelcome combination of high inflation and poor (stagnant) economic performance.

The current malaise is a "textbook example" of this phenomenon, says our economics editor, Faisal Islam.

Inflation - the rate at which living costs rise - is at its highest for decades. The Bank of England expects the rate to peak at more than 13% later this year.

The Bank is also predicting a recession later this year - which would mean the economy would shrink.

How will I get my £400 energy bill discount?published at 14:50 British Summer Time 5 August 2022

14:50 BST 5 August 2022

Beth Timmins
Finance reporter

Now for a query from Robert in Liverpool about the £400 discount on our energy bills that was announced by the government earlier this year.

I pay my combined gas and electric bill, in full, over the telephone using my credit card. Given that I don't use direct debit or a payment meter, how will I be credited my £400?

How the money is received depends on how each household pays its bill.

All customers with a domestic electricity meter who pay by card or by direct debit, either monthly or quarterly, will see an automatic deduction off their bills.

The money, part of the Energy Bill Support Scheme, will be paid in six instalments. Households will see a discount of £66 applied to their energy bills in October and November, and £67 a month from December to March 2023.

The £400 payment will apply directly to households in England, Scotland and Wales. The Treasury is still in discussion with Stormont ministers about how to make the payment to households in Northern Ireland.

All households are eligible for the full £400, regardless of income or size of house.

If you have a "smart" prepayment device, you will see an automatic monthly top-up added to your account, meaning you will have to add less credit to the meter for the total energy you use.

However, people with older "non-smart" prepayment devices will not get this money automatically. Instead, they will receive an energy bill discount voucher in the first week of each month, via text, email or in the post. Customers will have to redeem these in person at their usual top-up point, such as a local Post Office.

Customers who pay by payment card will be treated in the same way as standard credit or pay-on-receipt customers. Suppliers will be expected to credit payment card customers’ accounts with EBSS on a monthly basis. Payments will be credited to customers’ accounts, as if they had made an additional payment. This will then show on the customer’s next bill, issued according to the supplier’s normal billing schedule

Could the next PM force energy companies to reduce the standing charge?published at 14:44 British Summer Time 5 August 2022

14:44 BST 5 August 2022

Simon Read
Personal Finance Reporter

Back to your questions and Kay Tonna-Barthet asks:

We’re told higher bills are due to wholesale prices and yet up to £21.60 of every household monthly bill is actually a "standing charge". Could Rishi Sunak or Liz Truss pledge to force the energy companies to reduce the standing charge to zero for the winter months?

The standing charge from your energy company covers the cost of supplying your property with gas and electricity.

They must be paid whether or not you use any gas or electricity and the fees help pay for the UK’s energy distribution networks.

Currently, the standing charge for electricity on a monthly tariff is capped at 45p a day, and gas is capped at 27p a day.

If you paid the top rates for both types of energy, standing charges would therefore cost you about £263 a year, or around £21.60 a month as you say.

The energy price cap, set by regulator Ofgem but mandated by law, is already an example of the government limiting the amount energy companies can charge.

But neither of the potential PM hopefuls has mentioned taking action on standing charges.

Sunak has pledged to remove the 5% VAT charged on household energy bills for 12 months from October. The move would save each household an estimated £154.

Meanwhile, Truss has pledged a moratorium on the green energy levy, which would also save households about £150 a year.

Image source, Reuters

Mortgages

If you own your home, the chances are you've got a mortgage.

If you're on a fixed rate, that won't budge when interest rates change.

But if you're on a tracker or standard variable rate - and interest rates rise - your monthly payments will also go up.

Credit cards and loans

Even if you don't have a mortgage, changes in interest rates could still affect you.

Bank of England interest rates also influence the interest charged on things like credit cards, bank loans and car loans.

Savings

The Bank's decisions also affect the interest rates people earn on their savings.

Individual banks usually pass on rises in interest rates - giving savers a higher return on their money.

But savings rates are not keeping up with interest rates, as banks are not passing on full rate rises.

Let's take a step back from the questions and have a go at explaining some of the terminology. So what do we mean when we talk about inflation?

Put simply, it is the increase in the price of something over time.

For example, if a bottle of milk costs £1 and that rises by 5p compared with a year earlier, then milk inflation is 5%.

Every month a figure is released, estimating how much prices are rising overall - it's currently at 9.4% - which is the highest rate of price rises in 40 years.

Unfortunately, with wage rises not matching these soaring prices already, the Bank of England has forecast the rate of inflation will worsen and peak at above 13% later in the year.

Many things are contributing to the current high rate of inflation, including:

• Energy bills - which have risen rapidly because of high oil and gas prices and expected to increase sharply again from October
• Petrol and diesel prices - partly because the war in Ukraine has driven up the cost of crude oil, which is now falling but expected to remain high
• Food prices - as the war in Ukraine squeezes grain production and costs

The increase in the cost of living combined with incomes failing to keep up - what economists call a "real terms pay cut" - is putting a squeeze on people's finances.

Not all prices behave the same way. So, the cost of some things has grown a little or stayed the same, but for others it has rocketed upwards.

You can read more about what it means here.

Is this happening in other countries?published at 14:22 British Summer Time 5 August 2022

14:22 BST 5 August 2022

Dharshini David
Economics Correspondent

This is really a global problem.

Here in the UK we've been talking a lot about staff shortages. Some of that is to do with Brexit, because clearly we don't have the freedom of movement for workers coming over from Europe - and you can't go over to Europe and work quite as easily.

But talking to people around Europe as well, they too are seeing staff shortages after the pandemic. It's the same situation in America.

So this is really a global picture, in that sense.

And then the other part of that equation is recession: there aren't many other parts of Europe or indeed the US where they're saying exactly the same thing as the UK, but they're all looking at a pretty drastic downturn.

That 'R' word is starting to emerge - there are similar concerns happening around the globe.

It sounds a bit glib to say we’re all in this together, but this is a shared pain.

What about interest rates for savers?published at 14:16 British Summer Time 5 August 2022

14:16 BST 5 August 2022

Simon Read
Personal Finance Reporter

We've heard from Trevor Bowmaker, who asks:

What will happen to interest rates for savers?

The rate rise will not prove to be as good news for savers as it could be.

We would all welcome an extra 0.5% interest on our nest eggs, but banks and building societies are extremely unlikely to be that generous.

Santander was one of the first high street banks to announce changes to its saving rates on Thursday but raised rates by just 0.25% across some of its saver accounts and in-credit current accounts.

I’d expect rival high street banks to be similarly stingy or even less generous.

In fact, out of the biggest high street banks only one has passed on all five recent base rate rises since last December, according to figures from rates analysts Moneyfacts.co.uk.

So while the base rate climbed 1.15 percentage points in the last eight months before yesterday’s increase, savings accounts languished some way behind.

Some have passed on a relatively pitiful 0.09% since December 2021 and that realisation may prompt fed-up savers to look elsewhere at offers from challenger banks or building societies.

Are low income families going to be the worst hit?published at 14:10 British Summer Time 5 August 2022

14:10 BST 5 August 2022

Dharshini David
Economics Correspondent

Yes.

I’m afraid that’s something we already know is happening.

It’s something that happens in every single cost of living crisis, particularly when we’re looking at the staples being the most affected – fuel and food prices.

We’ve had a survey out this morning and we know that a third of households are having to rely on savings or borrowing to meet just the essentials in life, and the majority of households are now cutting back on essential spending as well.

Image source, PA Media

But it is those really at the bottom of the pile, in terms of income, who are feeling this hardest and will do so even more in the coming months.

We talk about energy bills rising in October - I’m afraid the really bad news is they’re going to go up again in January.

This is going to get worse before it gets better.

Will increasing interest rates combat inflation?published at 14:01 British Summer Time 5 August 2022

14:01 BST 5 August 2022

Dharshini David
Economics Correspondent

We've had a question in from Frederick who asks:

How does putting up interest rates help inflation? I get £206 a week pension, my mortgage has risen from £415 to £430, that leaves very little for me to live on.

I think Frederick unfortunately has hit the nail right on the head there.

The way that interest rates are meant to work as a tool of combatting inflation is they leave people like Frederick with less money at the end of the month, or the end of the week. Let's not forget businesses too, because a lot of them have debts linked to that interest rate.

Therefore, there is less money to spend on goods and businesses don't feel as confident to put prices up by as much.

That's meant to tame inflation, and keep it under control.

But, as Frederick says, what you get as a result is real pain for the people who are having to shoulder that burden.

It's far from ideal.

We'll be joined at 14:00 BST by the BBC’s economics correspondent Dharshini David, personal finance expert Simon Read and financial reporter Beth Timmins to answer some of your questions about the recession, interest rates and the cost of living.

Cafe owner Lindsay, from Edinburgh, says she is being “mindful” of the cost of her products because “coffee is an affordable luxury and we want that to remain”.

Asked on BBC Radio 5 Live’s Nick Campbell programme whether she had noticed changes in consumer behaviour, she says they had seen people begin to make “cost conscious” choices and buying cheaper drinks, but that her business has been somewhat sheltered from this because of its location.

Lindsay, who also runs a coffee roasters, explains they are also seeing businesses who buy from them wholesale in a “more uncertain” financial situation.

Our reporters have been out and about on the streets of Cardiff.

We asked for people's thoughts on the rise in interest rates - and looming recession.

The reaction? Mainly groans.

"It means you can have a lot less of the nicer things," says one woman.

"It puts a lot of pressure on you. I don’t have children or anything but I know my sister, all my friends, it’s difficult for them, especially after everything that’s just happened.

"The timing couldn’t be worse."

Financial stress is "one of those hidden ones that no one wants to talk about, it can be embarrassing", she says.

She adds that this can put strain on people’s mental health, especially men, which can have serious consequences.

The governor of the Bank of England has defended its decision to raise interest rates, saying there is a "real risk" of soaring prices becoming "embedded".

Andrew Bailey told BBC Radio 4's Today programme the UK has experienced a “domestic shock” with the “shrinkage in the labour force over the last two years or so”.

He explained that the first thing businesses want to talk to the bank about is the “problems they're having hiring people”.

Bailey emphasised businesses were also relating they are “not finding it difficult to raise prices at the moment”, adding:” Now we think that can't go on."

He also warned against high pay rises, saying this would make inflation worse and hit the poorest people hardest “because they don't have the bargaining power”.

In response to critics who say interest rates should have been raised a long time ago, Mr Bailey said nobody was calling for hikes given the context of the pandemic the UK was facing two years ago.

Read more here.

For most people, economic growth is good as it usually means there are more jobs, and companies are more profitable and can pay employees and shareholders more.

A growing economy also gives the government more money in taxes. So it can cut taxes, or spend more on benefits, public services and government workers' wages.

When the economy shrinks, all these things go into reverse.

Some people may lose their jobs, or find it harder to get promotions, or pay rises big enough to allow them to cope with increases in prices.

Graduates and school leavers could find a first job harder to get.

However, the pain of a recession is typically not felt equally across society, and inequality can increase.

Benefit recipients and those with fixed incomes are particularly likely to struggle.

Read more here.

The Bank of England is predicting a recession for the UK economy will begin later in 2022 and could last all of next year. So what exactly does that mean?

In normal times, a country's economy grows, which means its citizens, on average, become slightly better off as the value of the goods and services it produces – known as Gross Domestic Product (GDP) - increases.

But sometimes GDP falls, and a recession is usually defined as when this happens for two three-month periods - or quarters - in a row.

Image source, bbc

Good afternoon and welcome.

We’re back, picking up from yesterday’s hike in interest rates and news of an impending recession.

Interest rates have risen to 1.75% - the biggest single rise in 27 years - with inflation now set to hit more than 13%.

The UK is forecast to fall into recession this year, with the longest downturn since 2008 predicted.

What will it mean for workers, homeowners, families and businesses?

We’ll be here to answer your questions.