Inflation is at a 40-year high - and it's hitting the poorest people hardest

UK inflation has hit a 40-year high of 9 per cent amid soaring energy bills – and for the poorest people in the country it’s even higher, according to financial experts.

The Institute for Fiscal Studies (IFS) estimates soaring energy costs mean the poorest 10 per cent of households are facing inflation of 10.9 per cent, which is almost 3 percentage points higher than inflation rates for the richest.

That’s because those on the lowest incomes spend 11 per cent of their total household budget on gas and electricity, compared to just 4 per cent of the richest households, the IFS said.

Millions of people saw a £700-a-year rise in energy costs last month after the price cap was hiked by 54 per cent. It came alongside price rises in everyday essentials such as food and transport, which are outpacing household incomes and causing a cost of living crisis.

On Tuesday the government voted against a Labour amendment to the Queen’s Speech, which would have levied a windfall tax on oil and gas companies to help ease these spiralling costs.

Not one Conservative MP backed the move, which was rejected by 310 votes to 248.

The soaring cost of wholesale oil and gas globally has led to surging profits for oil and gas companies, who have benefitted from the rising prices, with Shell’s annual profits exceeding £14.2 billion.

The war in Ukraine has also contributed to price hikes of items such as food and petrol.

IFS said the expiration of the temporary VAT cut for the hospitality industry also meant the tax on meals out and hotel stays increased from a rate of 12.5 per cent, back to 20 per cent this month – while it was just 5 per cent in April of last year.

It’s now apparent that households across differing income groups are being disproportionately hit by rising inflation.

Heidi Karjalainen, a research economist at the IFS said: “Inflation hit 9 per cent in April. Because so much of the increase was driven by the increase in the gas and electricity tariff cap, poorer households who spend more of their budgets on gas and electricity, faced an even higher rate of inflation.

“We estimate that the poorest 10 per cent of households faced an inflation rate of 10.9 per cent. State benefits only increased by 3.1 per cent in April. This means big real terms cuts to the living standards of many of the poorest households.

“Continuing pressures, such as the war in Ukraine, are likely to push Ofgem’s October tariff cap, as well as other prices including food prices, even higher later this year. We are likely to be in a prolonged period during which poorer households are facing rates of inflation even higher than the headline figures would suggest.”

Labour is calling for an emergency Budget. Shadow chancellor Rachel Reeves said:  “Today’s inflation data will add to the worries families already face as prices soar and pay packets are crunched. 

“It makes it even more unconscionable that – while they pile taxes on working people in the midst of this crisis – the Conservatives voted last night against a windfall tax on oil and gas producer profits to cut families’ energy bills. 

“Our country faces a cost of living crisis, and a growth crisis. Neither are inevitable but a consequence of government policies and Conservative choices.

“We need an Emergency Budget now from the government to tackle the cost of living crisis, and we need a real plan for growth so we have a fairer and more prosperous economy.” 

Michael Clarke, head of information programmes at antipoverty charity Turn2us, said inflation rising would be a source of “huge concern and worry” for people who are already struggling to afford the essentials and called for a rise in welfare payments.

He added: “Many of us are already cutting back on energy usage and even turning to food banks to get by. The reality is, this increase is going to plunge thousands more people into financial insecurity and those on the lowest incomes will be unable to afford the basics needed to live. 

“Intervention is urgently needed to catch people before they fall into crisis in the months to come because our social security system should be able to provide the protection to weather this storm.”

Similarly, Rebecca McDonald, Senior Economist at JRF said: “Cuts and freezes to our social security system over the last decade left millions of families on low incomes struggling with the cost of living long before this crisis hit. Now, as the price of essentials like food and energy continue to soar, the chancellor’s inaction will make an already desperate situation for many even worse.

“The human cost of benefits lagging so far behind inflation is severe: parents skipping meals so their children can eat, families using a single lightbulb to limit electricity use, people cutting back on showers to save water. Allowing this to happen is a choice, and the government can and must choose differently.”

Citizens Advice Scotland is recommending anyone struggling with the cost of living in the short term to seek free, impartial and confidential advice from the Citizens Advice network, who can check for any missing social security payments or grants, and negotiate with creditors about re-structuring payments.