Poorest households are set to see inflation nearly a third higher than the richest

Families in the bottom decile of the income distribution will be at the sharp end of the latest development in the cost of living crisis, and changes to energy and fuel prices alone could mean they experience a rate of inflation almost a percentage point higher than households in the top income decile by the end of this year – according to new analysis released by the Resolution Foundation today (Thursday).

Happy new tax year 2026 weighs up the key personal finance changes in the new tax year against the backdrop of the impending price shock brought on by the conflict in the Middle East.

It notes that while families will feel the effects of another year of frozen tax thresholds – with £500 wiped off the personal tax allowance, as well as big, regressive increases in Council Tax – welcome increases to benefits and less-welcome rises in energy bills are likely to take centre stage.

The tax year has started with a welcome fall in Ofgem’s price cap – reducing typical energy bills by £117 a year – but the good news won’t last for long.

While there remains a high degree of uncertainty around the future path of energy bills, even a plausible best-case scenario – in which wholesale gas prices fall immediately to pre-war levels – would still mean around a £130 increase in the energy price cap in July. Alternatively, if the recent highs in gas prices become the norm for the remainder of the assessment period, the price cap could increase by close to £440, to around £2,100.

The burden of rising energy bills will fall unevenly. Poorer households in the second decile of the income distribution spend almost twice as much of their income on energy (11 per cent) as richer households in the ninth decile (6 per cent), meaning price rises in this area will hit poorer families hardest.

The report estimates that based purely on latest estimates of the energy-price shock a household in the bottom income decile would face an inflation rate of 3.8 per cent by the end of this year, compared with 2.9 per cent for the top decile – a gap of 0.9 percentage points. The gap would be greater still if the widely expected rise in food prices drives up inflation, as again poorer households spend more of their budgets on such essentials.

The analysis notes that these expected price rises will be softened for some lower income households by sorely needed benefit changes. Most notably, the end of the two-child limit will offer immediate relief to poorer families with three or more children, lifting 450,000 children out of poverty by the end of the decade.

Universal Credit will also see its first ever permanent real-terms increase – a landmark, if belated, step. However, after years of below-inflation rises, the value of unemployment support will still sit 5 per cent below its 2010 level. Over the same period the state pension has grown by 20 per cent.

The report cautions that with the conflict’s path deeply uncertain it remains possible that energy bills remain elevated well into the winter. If this transpires, the Government should not rely solely on existing policies that raise benefits and reduce energy bills.

But the Government has time to act. With only 6 per cent of gas and 21 per cent of electricity consumption taking place between July and September these price increases would not bite fully until autumn. The Government should use this time to develop a social tariff on energy bills, providing targeted, temporary support based on household income should bills remain high come the winter.

Lalitha Try, Economist at the Resolution Foundation said:

“The cost of living crisis never ended for millions of households – and now a new price shock is on the way, care of the conflict in the Middle East.

“Once again, it is the poorest families who will feel it most. They spend more of their income on essential costs like energy and food, meaning they experience a materially higher inflation rate than their better-off peers.

“The Government’s real-terms increase in Universal Credit this year is welcome and will go some way to reversing its historic erosion. But with energy bills set to rise sharply ministers should be preparing a social tariff that gives low-income households protection against the next price shock – and the one after that.”