Britain faces the biggest income squeeze in generations

The conflict in Ukraine is forecast to further push up energy prices and wider inflation, causing typical household incomes across Britain to fall by four per cent in the coming financial year.

According to the Resolution Foundation, even before the war in Ukraine, the outlook for living standards this coming financial year was bleak with soaring energy bills this April disproportionately affecting low- and middle-income families.

Now the think tank says that families across Britain should now brace themselves for an even deeper living standards squeeze as the war in Ukraine persists. 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 four 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 Foundation notes that for low and middle-income families, the benefit system is supposed to protect family incomes from changes in the cost of living. However, the current system of uprating benefits (which are increased in April in line with CPI inflation the previous September) means putting poorer households through a living standards rollercoaster over the next two years instead.

As well as providing immediate support to help families through the current cost of living crisis, the report highlights two persistent living standards challenges that need to be addressed: rising poverty and weak pay growth.

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 per cent next month, at a time when inflation could be as high as eight per cent.

“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.”