A progressive think tank has warned that Britain must be ready for the largest income squeeze in its history as the conflict in Ukraine pushes inflation up to 40 years high.
The conflict in Ukraine is expected to increase energy prices and further inflation, to more than 8 per cent this spring. This will cause typical household incomes across Britain to fall by 4 per cent in the coming financial year, the sharpest fall since the mid-1970s, according to the Resolution Foundation’s annual Living Standards Outlook for 2022.
The report examines how the UK will fare as it transitions from a Covid-crisis to a cost of living crisis. The report also contains new analysis that shows how the conflict in Ukraine could lead to higher energy bills and greater inflation at home.
According to the Foundation, even before the war in Ukraine the outlook for living standards in the coming financial year was grim due to high energy bills this April that disproportionately affected low- and middle-income families.
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The report warns that families across Britain can expect a further drop in living standards as the conflict in Ukraine continues. Inflation could peak at 8.3 per cent this Spring – or even exceed the 8.4 per cent rate in April 1991 that is the highest seen since 1982. Inflation across 2022-23 as a whole could be 7.6 per cent – significantly above the 6.2 per cent forecast by the Bank of England just last month.
As a result, the Foundation projects real typical household incomes to fall by 4 per cent in 2022-23, a fall of £1,000 per household, the sharpest annual income fall since the mid-1970s.
This fall would be even larger without the £350 boost to incomes that the Government’s energy rebates package will provide for most households. The growth for the next year (2023-24), however will be very weak as some of this support has been reclaimed and high inflation persists.
The report shows that 2025-26 household income is expected to be lower than 2021-22 if productivity and wages do not improve. In terms of household incomes, the pandemic may have been as good for the first half of 2020s.
The Foundation points out that the benefit system is supposed protect families from rising living costs for low- and middle-income families. The current system of increasing benefits (which are increased in April to keep pace with CPI inflation in September) means that poorer households will experience a rollercoaster ride in their living standards over the next two-years.
In April, the State Pension and most of the working age benefits are expected to rise by 3.1%. However, inflation could well be higher than 8%. Over the course of the year, this will mean a real-terms cut in the value of benefits of over £10 billion – more than the amount the Government spent on pandemic-related temporary benefit increases in 2020-21 – which will reduce the real value of basic unemployment support to its lowest level since the early 1980s.
The Foundation projects that benefits will increase by around 7 percent in 2023, due to high inflation. Although benefit levels should end this rollercoaster at the same point in real terms as it began, the Foundation warns that the current famine-and-feast approach to income shock families could lead to an increase in their income shock this year.
According to the think tank, the Chancellor should address these issues in his Spring Statement. This would include increasing benefits by five percentage points this year (an 8.1% rise) and decreasing their increase by the same amount next year (2023-24). Benefits that can’t be re-uprated at such short notice should increase in October at the very latest, they argue.
The report provides immediate support to families to help them through the current cost-of-living crisis. It also highlights how the unwinding and rollout of benefit cuts in 2015 combined with the removal of pandemic assistance means that absolute poverty will be higher than at the beginning of the decade. This is a first in modern Britain.
- While a tight labour market is currently driving respectable nominal wage growth, the think tank claims a step change in productivity growth – which over the last decade fell to its weakest level in 120 years – will be needed to overcome weak wage and income growth over the long term.
Adam Corlett, Principal Economist at the Resolution Foundation, said: “Britain has stepped out of a global pandemic, and straight into a cost of living crisis. The tragic conflict between Ukraine and Britain is likely to drive up energy prices and increase other goods. This will also make it more difficult for families to earn the incomes they need. Inflation could rise to levels not seen since the early 1990s. Household incomes are likely to fall in times of recessions.
“For millions of low-and-middle-income families, this inflation-driven squeeze will be made worse by a living standards rollercoaster. The State Pension and working-age benefits will be uprated by 3.1% next month at a time when inflation could reach 8%.
“The immediate priority should be for the Chancellor to revisit benefits uprating in his upcoming Spring Statement. In the longer term, turning around the UK’s relative decline compared to other advanced economies, and reversing our terrible recent record on productivity, is the only route to meeting the living standards challenges Britain faces.”