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British households will be £1,000 worse off next year, thinktank warns

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British households will be £1,000 worse off next year from a cost of living squeeze created by rising energy prices and shortages of workers and supplies caused by Covid and Brexit, a leading thinktank has warned.

The Resolution Foundation said higher levels of inflation would weigh down workers’ earnings next year, contributing to a hit to the average household income in Britain at a time when the government is cutting benefits and raising taxes.

It said the average household disposable income, after adjusting for inflation, would be about 2% lower by the end of 2022 relative to forecasts made in March by the Office for Budget Responsibility (OBR), before the surge in shop and energy bill prices.

Although the OBR had predicted that household disposable income would rise in 2022, the Resolution Foundation said soaring inflation would mean households would have £1,000 less than originally forecast.

“Higher inflation reduces the amount of goods and services that households are able to afford, eroding the real value of incomes,” it said.

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The warning comes amid mounting concern over the impact of the rising cost of living this autumn, as surging wholesale gas and electricity costs feed through into higher energy bills, and as the price of a weekly shop climbs.

In an intervention before Rishi Sunak’s post-lockdown budget next week, the Resolution Foundation said that, on top of the hit from inflation, many households would also have to reckon with cuts to universal credit, while workers and businesses must budget for planned national insurance tax increases.

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The government slashing universal credit by £20 a week from early October will cost those households £1,040 a year, including for millions of working families, in the biggest overnight cut for social security benefits on record.

Issuing the chancellor a warning that a “cost of living crunch” was brewing from the combined impact of inflation, tax rises and cuts, the thinktank 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, as measured by the consumer prices index, had its biggest monthly jump on record in August, hitting an annual rate of 3.2%, the highest rate in nearly a decade after a sharp rise in the cost of energy, food and drink.

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The Bank of England has warned rising household energy bills will cause inflation to peak above 4% this winter, with the gauge for the rising cost of living forecast to stay at elevated levels until at least the summer before gradually fading again.

Sunak has warned the sharp jump is a key risk being closely monitored by the Treasury for the potential impact it could have on the government finances, with the cost of servicing the national debt linked to inflation and interest rates.

The Resolution Foundation said the chancellor was on course for an improvement in the government’s finances worth about £30bn next year, compared with earlier forecasts for the budget deficit. However, it said this was smaller than some economists assumed because rising inflation was pushing up borrowing costs.

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The thinktank also warned that Sunak had little wriggle room over coming years because of huge uncertainties over the economic outlook.

Britain’s economy is expected to grow by 7.5% this year, the fastest peacetime annual growth rate in nearly a century, after the largest contraction over the same period in 2020.

However, growth has slowed to just 0.3% in July and August, while fears are mounting over rising inflation and a possible need to raise interest rates to compensate.

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.”