Cost of living squeeze will bite low-and-middle-income households as rising prices and benefit cuts wipe out wage gains

A typical low-income family with children could see their income fall by over £20 a week over the next six months as households across the UK experience a triple whammy cost of living crunch from rising prices and energy bills along with falling income support, according to new analysis published today (Sunday) by the Resolution Foundation.

The Foundation’s analysis examines the impact of several cost of living pressures hitting Britain over the next six months, including:

  • CPI inflation hitting 4 per cent – its highest in a decade – over the winter;
  • Rising energy bills with the 12 per cent increase in the energy price cap from 1 October, likely to be followed by a projected 19 per cent increase from 1 April 2022;
  • The £20 a week cut to Universal Credit (UC) from 6 October; and,
  • The 1.25 per cent Health and Social Levy from next April.

More positively, the Foundation notes that several living standards tailwinds should help to relieve some of these pressures, including:

  • A 37p (4.2 per cent) increase in the National Living Wage (NLW) from next April; and,
  • The highest benefits uprating since 2012 next April as a result of inflation forecast to hit 2.7 per cent this September.

The Foundation notes while the Government has pointed to strong wage growth helping families over the winter, in fact real wage growth is likely to turn negative for many workers when inflation hits 4 per cent.

Bringing all of these cost of living pressures and reliefs together, the Foundation finds that families with children are likely to be hit hardest by the upcoming cost of living squeeze.

For example, a couple with two children, both working full-time and earning the NLW and slightly above that rate, would be £23 a week worse off over the next six months – with the welcome £3 a week boost from the NLW dwarfed by rising energy bills and the cut to UC.

The analysis also shows that a single parent working part-time could see their income fall by £20 a week over the next six months, while even a low earner without children working full-time on the National Living Wage could see the £9 a week income boost from the forthcoming rise in the NLW wiped out by the rising cost of living.

The Foundation notes that while many aspects of the cost of living crunch are beyond the government’s control – with countries around the world experiencing high inflation and rising energy bills off the back of the global economy suddenly reopening over the summer – many of the pressures, notably for 4.4 million families claiming Universal Credit, are driven by government policy.

This, says the Foundation, means that unless the Government changes course they risk ‘owning’ the cost of living squeeze that will affect households across the country over the next six months.

Karl Handscomb, Senior Economist at the Resolution Foundation, said:

“Britain is about to enter a tight cost of living squeeze over the next six months as high inflation and rising energy bills collide with the Government’s decision to cut benefits and raise taxes. Low-and-middle-income families will face the tightest squeeze.

“Many drivers of high inflation should be short-lived, but that will be of little comfort to families struggling over the coming weeks and months.

“While policies like the National Living Wage will deliver a welcome income boost for some, for many low-income families this won’t come close to offsetting the damage caused by cutting Universal Credit.

“Maintaining the £20 a week uplift will go a long towards easing the coming cost of living squeeze for millions of families.”