British households will be as much as £1,000 worse off next year amid a cost of living crisis created by energy prices, worker shortages and supply chain issues caused by Brexit and Covid, a top think-tank has warned.
The Resolution Foundation said high levels of inflation would dampen workers’ earnings next year, contributing to a hit on Britons’ average household income – even as the government cuts benefits and raises taxes.
Researchers said the average household disposable income, after adjusting for inflation, would be about two per cent lower by the end of 2022 relative to forecasts made by the Office for Budget Responsibility (OBR) in March – before the surge in energy prices and food bills.
The OBR had suggested household disposable income would rise in 2022, but the Resolution Foundation said high inflation meant households would have £1,000 less than forecast.
Universal credit cut
“Higher inflation reduces the amount of goods and services that households are able to afford, eroding the real value of incomes,” the think-tank said.
Issuing the warning ahead of Rishi Sunak’s post-lockdown budget next week, it said many households will also have to stomach cuts to universal credit – while workers and businesses would have to budget for planned increases to national insurance.
The slashing of the £20 universal credit uplift earlier this month will cost households £1,040 a year – representing the biggest overnight cut for social security benefits on record.
Cautioning of a “cost of living crunch”, the Resolution Foundation said: “Together with a £13bn raid on household incomes from increases in NICs [National Insurance contributions], and sharp cuts to universal credit, there will be major headwinds to families’ spending power in the coming months.”
Official figures show inflation had its biggest monthly jump on record in August, hitting an annual rate of 3.2 per cent – the highest rate for nearly a decade.
The Bank of England has wanted rising household energy bills will cause inflation to peak above four per cent this winter.
‘Cost of living crunch’
James Smith, research director at the Resolution Foundation, said: “The backdrop to the budget will be a strong recovery from the pandemic that risks being derailed by rising inflation and economic disruption that will squeeze both the chancellor’s borrowing windfall and family budgets.
“The decisions that Rishi Sunak will take next Wednesday will help to define the rest of the parliament, and the type of chancellor he’ll be remembered as.
“But amid such long-term and legacy-defining announcements, he must not forget the cost of living crunch facing families up and down the country right now.”
The Treasury said: “We are supporting people with the cost of living, including through a new £500m support fund to help vulnerable households, the energy price cap, and support with energy bills through the winter.
“Our Plan for Jobs is also helping people across the country to find great work and progress in their careers.”