Britain faces the biggest income squeeze in generations as Ukraine conflict pushes inflation towards 40-year highs

The conflict in Ukraine is forecast to further push up energy prices and wider inflation (to over 8 per cent this Spring), causing typical household incomes across Britain to fall by 4 per cent in the coming financial year (2022-23), the sharpest fall since the mid-1970s, according to the Resolution Foundation’s annual Living Standards Outlook for 2022.

The report examines the outlook for living standards as the UK steps out of a Covid-crisis, and straight into a cost of living crisis. It also includes new analysis showing how the conflict in Ukraine may feed into higher energy bills and wider inflation at home.

The Foundation says that 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.

Families across Britain should now brace themselves for an even deeper living standards squeeze as the war in Ukraine persists, the report warns. 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 4 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. However, growth in the following year (2023-24) will also be weak, as some of this support is clawed back and high inflation persists.

The report shows that without a considerable improvement in the outlook for productivity and wages, the typical household income in 2025-26 is set to be lower than in 2021-22. For the first half of the 2020s then, the pandemic may actually have been as good as it gets in terms of household incomes.

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.

Most working age benefits and the State Pension are due to rise by 3.1 per cent in April, at a time when inflation could well be over 8 per cent. Over the course of the year, this will mean a real-terms cut in the value of benefits of over £10 billion – more than the amount the Government spent on pandemic-related temporary benefit increases in 2020-21 – which will reduce the real value of basic unemployment support to its lowest level since the early 1980s.

High inflation this year would in turn drive a far higher increase in benefits next year, with the Foundation projecting benefits to rise by around 7 per cent in April 2023. While benefit levels should end this rollercoaster roughly where they began it in real terms, the current famine and feast approach risks worsening the income shock families this year, says the Foundation.

The Chancellor should address this in his upcoming Spring Statement via increasing benefits by a further five percentage points this April (an 8.1 per cent rise) and reducing their increase by a similar amount the following year (2023-24). Benefits that can’t be re-uprated at such short notice should increase in October at the very latest.

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, including:

• Rising poverty. While unprecedented support reduced poverty rates during the first year of the pandemic, the unwinding of that support, coupled with the rollout of benefit cuts announced back in 2015, mean that the proportion of children living in absolute poverty is set to be higher in 2026-27 than it was at the start of the decade. This is something never seen before in modern Britain.
• Weak pay growth. While a tight labour market is currently driving respectable nominal wage growth, a step change in productivity growth – which over the last decade fell to its weakest level in 120 years – will be needed to overcome weak wage and income growth over the long term.

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 8 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.”