Signs at the cost of living protests in London on February 12, 2022. Image: Garry Knight / Flickr
Households are facing the steepest drop in real-terms income for 50 years due to the escalating cost of living crisis, a new study has found.
From this spring, real incomes will plunge by four per cent – the sharpest fall since the mid-1970s, according to the Resolution Foundation. It means most families will be an average £1,000 worse off per year.
Soaring energy prices are set to combine with the economic fallout of the Ukraine invasion while wages and benefits fail to keep up with the cost of living, the think tank warned.
“Britain has stepped out of a global pandemic and straight into a cost of living crisis,” said Adam Corlett, principal economist at the Resolution Foundation.
“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.”
Russia’s invasion of Ukraine has already had a significant impact on global oil and gas prices, with UK gas costs now almost triple what they were at the start of February. Those costs will be passed onto consumers in the months to come.
The report paints a bleak picture of UK family finances for years to come. Without a significant increase in average wages, typical household incomes are set to be lower in 2025-26 than in 2021-22, the analysts said. This means the pandemic “may actually have been as good as it gets” in terms of incomes across the country, for at least the first half of the 2020s.
The findings are “extremely worrying”, said Labour’s shadow chancellor Rachel Reeves, and make it “more urgent than ever that the chancellor cancels his planned national insurance hike”.
Ministers will increase national insurance payments by 1.25 per cent starting next month, dubbed a health and social care levy by Boris Johnson.
“The government has allowed the cost of living crisis to spiral out of control since September, refusing to take action – and in fact proposing now to make it worse with an unfair tax hike.”
The report notes the social security system is supposed to protect families who could struggle to afford daily essentials, but that next month benefits will increase by just 3.1 per cent – less than half of inflation which “could be well over eight per cent”.
This will mean a real-terms benefits cut of more than £10bn, the think tank said, more than the government spent on the £20-per-week universal credit increase – which was cut last October – across 2020 and 2021. Responding to the findings, Richard Walker – managing director for Iceland supermarkets – warned food prices could soar above even the eight per cent inflation figure predicted.
It means the proportion of children living in the deepest poverty will be higher in 2026-27 than at the start of the decade, which analysts said is something “never seen before in modern Britain”.
The household income crisis will result in a “living standards rollercoaster” for millions of families, Corlett said.
“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.”
A government spokesperson said: “We recognise the pressures people are facing with the cost of living, which is why we’re providing support worth around £20bn this financial year and next to help.”