Households are set to absorb the worst shock to their living standards in recent history driven by the Russia-Ukraine conflict sending energy prices skyrocketing, reveals fresh research published today.
Gas prices have surged to their highest level ever on concerns over Moscow squeezing energy flows in retaliation to Western sanctions, which could push UK inflation to levels not seen in decades.
Each household in Britain will suffer a £1,000 hit to their income this year as a result of inflation averaging 7.6 per cent across the whole of this year, according to the economic think tank the Resolution Foundation (the Foundation).
That would be the worst reduction in living standards since the 1970s, according to calculations by the Foundation.
“Britain has stepped out of a global pandemic, and straight into a cost of living crisis,” Adam Corlett, principal economist at the Foundation, said.
The income squeeze is likely to choke consumer spending due to Brits slashing purchases amid severe pressure on their budgets, casting doubt over the strength of the UK’s economic recovery from the pandemic this year.
The possibility of the Russia-Ukraine ratcheting up the cost of living in the UK has “tilted growth risks to the downside, with a rising probability of a flatlining – or even shrinking – fourth quarter-2022 economy,” Sanjay Raja, senior economist at Deutsche Bank, said.
Economists at Goldman Sachs reckon the energy price cap could rise a further 55 per cent in October to account for the surge in energy prices, sending the cost of living to 9.5 per cent.
Brits are set to shoulder a 1.25 percentage point national hike and a similar rise to the cap in April, underling the existing pressure household finances are already under.
“Even before the war in Ukraine, the outlook for living standards this coming financial year was bleak with soaring energy bills,” the Foundation said.