Higher energy prices could leave typical British households £480 worse off this year

Higher energy prices due to the conflict in the Middle East are set to deal a blow to British living standards, with market pricing suggesting that the median working-age household will be £480 worse off this year than they would have been if the conflict had not taken place, the Resolution Foundation said today (Monday).

Despite some lower-income households receiving a long-overdue real-terms increase in their benefits, we now estimate – based on market-forecasts for the rise in energy prices consistent with market pricing after the announcement of a ceasefire – that average income growth for the poorest fifth this year is now set to be just 1.2 per cent, down from 2.8 per cent before the conflict.

The picture is brighter for families in the bottom half of the income distribution with three or more children. Even after the inflation shock, the abolition of the two-child limit is estimated to deliver 7.7 per cent income growth for this group this year – compared to 0.0 per cent for poorer families with fewer than three children.

Further up the distribution, rising energy prices will likely tip living standards growth into negative territory: the typical household, previously on track for 0.9 per cent growth, is now set to see its income fall by 0.6 per cent – a difference of £480 – over the course of the current financial year.

While the conflict’s future course remains highly uncertain, absent large falls in energy prices the increased cost of energy bills and petrol at the pump will almost certainly be passed on to households.

The Foundation urges the Government to accelerate work on a social tariff ahead of winter, when energy costs will hit hardest, to offer targeted support to struggling households. This approach would protect the households most exposed to the price shock, including those with high energy needs.

James Smith, Chief Economist at the Resolution Foundation, said:

“Despite hopes for a sustained peace, the path of this conflict remains uncertain and energy prices remain well above pre-war levels, meaning many households face a decline in their purchasing power this year.

“This squeeze will run right through the income distribution. Lower-income households will still see some income growth thanks to a long-awaited rise in real benefit levels, but inflation will likely knock more than a percentage point off what they stood to gain. For those in the middle and towards the top of the income distribution, even the thin growth they had been expecting has tipped into negative territory.

“Deescalation is certainly welcome, but damage to household finances this year is to a large degree already done. The Government should act now to prepare a social tariff that reaches households falling through the cracks this winter.”