RISING food and energy prices risk driving a second inflation spike this autumn.
The impact will be felt unevenly, with poorer households facing a 10 per cent spike – significantly higher than the peak for richer households, according to a new report from the Resolution Foundation.
The Foundation says the Chancellor should focus support in his upcoming Spring Statement on low-and-middle-income families who are being hardest hit by the cost of living crisis.
Called Catch 2022, the report examines the UK’s rapidly evolving economic outlook ahead of the Spring Statement on Wednesday 23 March.
The Chancellor is heading into the Spring Statement with good news on the public finances but terrible news on the family finances.
Borrowing for the current financial year (2021-22) is due to be £30 billion lower than forecast back in October, with tax revenues expected to come in £40 billion higher than forecast. This revenue-rich recovery is due to a wide range of factors, including a switch from self-employment to employee jobs and stronger wage growth, particularly among high earners who pay more tax on every extra pound they earn.
The outlook for the family finances is bleak however, and the report says that the conflict in Ukraine means there is heightened uncertainty around the UK’s economic outlook, with the only certainty being that it has deteriorated markedly.
The conflict will cause higher inflation – now likely to peak at over eight per cent – which will in turn will cause higher debt repayments for the Chancellor and a deeper income squeeze. The Resolution Foundation says the typical family could see a fall of 4 per cent, or £1,000, in 2022-23.
The conflict is also likely to weaken GDP growth, and increase the probability of a recession.
James Smith, research director at the Resolution Foundation, said:
“Until recently, the Chancellor was approaching his upcoming Spring Statement with good news on the public finances and little pressure to make any big policy calls. Fast rising inflation, exacerbated by the conflict in Ukraine, has changed all this.
“The chances of a living standards recovery this year are receding as rapidly as inflation is rising, and the risk of another recession is looming into view. The Chancellor will therefore need to make some tough, and potentially expensive, choices in how to respond.”
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