Inflation to hit 40-yr high with incomes plummeting to levels ‘not seen outside recession’

The conflict is forecast to push up the cost of living to more than eight percent this Spring which will cut the typical household income by £1,000 (four percent) in the coming financial year (2022-23). This will be the sharpest fall since the mid-1970s, according to the Resolution Foundation’s annual Living Standards Outlook for 2022. Even before the Russians invaded Ukraine, the outlook for living standards this year was bleak with soaring energy bills this April disproportionately affecting low- and middle-income families.

Inflation could peak at 8.3 percent in the next couple of months – or even exceed the 8.4 percent rate in April 1991 that is the highest seen since 1982, warned the thinktank.

And inflation across 2022-23 as a whole could be 7.6 percent – significantly above the 6.2 percent forecast by the Bank of England in February.

The real incomes drop of £1,000 per household for non-pensioners – a scale of decline which would normally be associated with recessions – according to researchers.

The fall would have been worse without the £350 boost to incomes the UK Government’s energy rebates package will give households.

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 in Ukraine is likely to further drive up the price of energy and other goods, and worsen the squeeze on incomes that families across Britain are facing.

“Inflation may even exceed the peak seen during the early 1990s, and household incomes are set for falls not seen outside of recessions.

“For millions of low and middle-income families, this inflation-driven squeeze will be made worse by a living standards rollercoaster.

“Working-age benefits and the state pension are due to be uprated by just 3.1 percent next month, at a time when inflation could be as high as eight percent.”

Over the course of the year, this will mean a real-terms cut in the value of benefits of over £10bn – more than the amount the Government spent on pandemic-related temporary benefit increases in 2020-21.

Mr Corlett added: “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.”

The think-tank’s report warned:  “High inflation will make falling real household incomes the defining economic feature of 2022.

“The crisis in Ukraine has increased both the scale of price rises but also the degree of uncertainty about their levels and duration.

“So far, the conflict has substantially increased the price of oil and natural gas.”

“The UK’s post-Covid economic recovery is well under way, but a deep living standards downturn is just getting going.”

Imran Hussain, of the charity Action for Children, said: “The likely fall-out of the Ukraine conflict with even higher energy bills and inflation rates not seen for a generation is a double blow for low-income families, already locked in a crippling cost of living crisis. 

“At the end of last year, many of the families we help lost £1,000 a year in Universal Credit.

“These families were already facing an extra £700 a year on energy bills, but it now looks likely these will rise further, just as real incomes nose-dive. 

“We’re going to see more children going hungry as parents struggle to make ends meet.”

Income growth in 2023 to 2024 is expected to be weak, the Foundation’s report said.

Without a considerable improvement in the outlook for productivity and wages, the typical household income in 2025 to 2026 could be lower than it was in 2021 to 2022.

This suggests that during the first half of the 2020s, the pandemic may actually have been “as good as it gets in terms of household incomes”.

And the report warned that there will be “no rapid rebound from the period of high inflation”.

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