Real incomes likely to fall significantly over 2022

Date : 09 March 2022

As inflation caused by the conflict in the Ukraine has begun to impact households, the Resolution Foundation anticipates the average household to be £1000 worse off over 2022, with further falls in real incomes to come in future years.

In early February, the Bank of England (BoE) stated that households face the biggest cost of living squeeze in 30 years, with inflation peaking at 7.25% in April, before falling back over the year. Given the rapid escalation of the conflict in the Ukraine and the subsequent changes in the commodity markets, this forecast is already out of date.

The Resolution Foundation (RF) and the Centre for Economics and Business Research (CEBR) estimate that inflation may now peak at over 8% in April, with continued inflationary pressure throughout the year. The CEBR predict the impacts of the war in the Ukraine will keep inflation above 7% into Q1 2023 – this persistent inflation effect is a key difference versus the earlier Bank forecast.

The most immediate concern for households is dramatic change energy markets, specifically oil and gas. Oil prices are approaching record levels, topping $130 per barrel with petrol pump prices expected to reach £1.60 a litre in the coming weeks.

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Even prior to the escalation of the conflict in the Ukraine energy prices were up significantly. Prices are scheduled to rise from April 1st by 54%, increasing the average household bill by £693 a year. However, since the escalation of the conflict in the Ukraine, the UK natural gas market has seen exceptional levels of volatility. The expectation now is that the next round of energy prices could increase the cap by a further 50% in October 2022. This will lead to an increase in energy prices of over £1650 over 6 months for the average household.

In order for households to manage expected price rises, pay would have to increase by levels not seen for many years. As we have previously shared, the real pay vs the broadest range of household costs has been negative since November 2021, with the situation likely to get worse before it gets better.

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Given the changes in economic circumstances prior to the Ukraine conflict, the RF have forecast that real household incomes, when adjusting for inflation are to fall by 4% over 2022, equivalent to £1000 per household. The CEBR have gone further, estimating the impact of the changes in commodity markets and are considerably more negative, expecting a fall of £2500 per household over 2022. Prior to the dramatic changes in recent weeks, the BoE did not expect real pay to increase until Summer 2024, it is now expected that this situation will worsen.

In recent days the UK and US have announced bans on Russian oil, whilst the EU is aiming to reduce its reliance on Russian gas by two thirds over this year. These sanctions are increasing pressure on global wholesale energy prices and any further tightening of sanctions would likely worsen the picture for consumers in the UK.

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