Swelling energy bills are set to drag on the UK economy this year by sending a chill through household spending, reveals new research published today.
Household energy bills will almost double in October even after rebates are handed out, according to new forecasts published by the EY Item Club today.
The downbeat assessment adds to the growing body of evidence indicating the cost of living crunch will slow the UK’s recovery from the Covid-19 crisis.
Brits are already bracing to absorb a 54 per cent uplift to their annual energy bills next month. However, in October they will rise again to account for the Russia-Ukraine war sending oil and gas prices soaring, hitting a shade under £2,500, up over £1,000 from their current level.
The Sunday Times reports Rishi Sunak is considering offering a second multi-billion pound council tax rebate to help households with the October energy price hikes, after already cutting fuel duty by 5p and cutting National Insurance Contributions for employees on Wednesday.
Paul Johnson, director at the influential Institute for Fiscal Studies think tank, said the average British worker would still be £400 worse off in 2022-23 despite Sunak’s interventions last week.
Boris Johnson’s deputy chief of staff David Canzini revealed polling to ministerial aides on Friday that showed the cost of living crisis was now the number one priority for voters, with one person in attendance telling The Sunday Times that “the cost-of-living issue is a train about to hit us”.
Whitehall officials have suggested that Sunak will step in to cover half of the increase in energy bills later this year.
Living standards in the UK are on track to erode at the worst rate since the mid 1950s this year, according to the government’s fiscal watchdog.
The Office for Budget Responsibility estimates real disposable income will shrink 2.2 per cent this year, caused by a combination of inflation averaging 7.4 per cent in 2022 and the government saddling households with a heavier tax burden.
In four years’ time, the tax burden will top 36 per cent, the highest rate since the late 1940s, the OBR said last week, adding to the squeeze on incomes.
Living standards fall when incomes fail to keep pace with the rate of price rises.
“The war in Ukraine has prompted a rise in energy and commodity prices, which have placed a drag on UK economic activity,” the EY Item Club added.
Poorer households will suffer the worst blow from energy bills soaring due to this group spending a relatively larger proportion of their budget on heating their homes.
Their inflation rate could reach 10 per cent and stay elevated for longer, the EY Item Club said.
However, higher energy prices are set to hobble businesses by raising production costs and eating into margins.
Thinner margins will erode business investment, dragging further on economic growth.
“Businesses don’t have access to the same support though and also face rising capital goods prices, further disruption to their supply chains, and prolonged uncertainty,” Hywel Ball, EY’s UK chair, said.
“These factors will inevitably pare back the expected post-pandemic bounce back in business investment,” he added.