UK households face the biggest squeeze on their incomes since the mid-1970s as the Ukraine conflict deepens the cost of living crisis, a think-tank has warned.
Britain is already experiencing its steepest inflation in three decades and a renewed surge in oil and gas prices caused by the war is set to push it above 8%, according to the Resolution Foundation.
With wage growth and benefits growing more slowly, household incomes in the 2022/23 financial year are expected to fall by 4% – or around £1,000 – in real terms, the think-tank said.
Fuel prices are aleady at record levels
That would be the biggest fall since the mid-1970s, according to the organisation’s annual Living Standards Outlook report.
It comes as the retail industry warns consumer confidence “will likely tumble” as a result of the impact of the Ukraine conflict on the cost of living.
Labour said the findings meant it was “more urgent than ever” that a national insurance hike planned for April should be cancelled.
The main driver of the squeeze on households is energy bills, which are set to surge by a typical £693 annually from April for millions when Ofgem’s latest price cap increase takes effect.
That has been caused by surging wholesale gas prices – but these have only climbed further following Russia’s invasion of Ukraine and this week shot to new record highs.
It means that when the regulator revises the price cap again October, typical annual bills could rise by a further £900, according to the Resolution Foundation.
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Bank governor explains ‘very big shock’ from inflation
The report said falling real household incomes would be the “defining economic feature of 2022” – and pointed out that surging energy prices disproportionately hurt poorer households who spend a bigger chunk of their incomes on gas and electricity bills.
The Bank of England said last month that it expected inflation to top 7% in April, which would already imply a significant squeeze on households.
But according to the Resolution Foundation analysis it could now near or even exceed the 8.4% level seen in April 1991 – potentially taking inflation to its highest since 1982.
That would mean real household incomes falling at a rate not seen outside recessions, it said.
Torsten Bell, chief executive of the Resolution Foundation, said: “While the economic fallout from the war will feel trivial compared to the suffering experienced by millions of Ukrainians, it will still have a significant impact in Britain.”
The think-tank called for chancellor Rishi Sunak to hike benefits by 8.1% this spring, five percentage points higher than the currently-planned 3.1% increase.
In addition to the wholesale gas price surge, the Ukraine conflict has also pushed oil prices to their highest level since 2008 – a development likely to drive UK petrol and diesel costs, already at record levels, to new highs.
A range of other commodities from wheat to aluminium have also seen steep increases that may also be expected to feed through to consumers.
With prices spiralling, stores will soon feel the squeeze as consumers scale back discretionary spending, according to the British Retail Consortium (BRC).
It warned that, while latest data showed sales continuing to grow last month despite the impact of storm Eunice, tougher times were to come.
BRC chief executive Helen Dickinson said: “Consumer confidence, falling in recent months, will likely tumble further against the backdrop of the current geopolitical events.”
Simon French, chief economist at Panmure Gordon, expects that “huge revisions” in economic forecasts are on the way following the surge in gas prices, including in the spring statement from the chancellor expected later this month.
He said: “No economic modelling conducted in recent months will be capturing the rotation in spending power away from UK households.”