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Higher energy prices will mean a decline in living standards for a typical British household over the coming year, wiping out even the meager income growth expected before the outbreak of the war in Iran, new analysis shows.
The Resolution Foundation think tank said in a report published on Monday that prices in energy markets suggested the average working-age household would be £480 worse off over the financial year as a result of the conflict, with income falling 0.6 per cent rather than rising 0.9 per cent as previously expected, even after last week’s ceasefire.
“De-escalation is certainly welcome, but much of the damage to household finances has already been done this year,” said James Smith, chief economist at the Resolution Foundation.
“These pressures will cut across the income distribution,” he added. “Lower-income households will still see some income growth, thanks to a long-awaited increase in real benefit levels, but inflation is likely to be off by more than a percentage point from what they could gain. For those in the middle and top of the income distribution, even the meager growth they expected has fallen into negative territory.”
The think tank is urging ministers to only provide targeted support to poorer households, saying the UK’s public finances are not strong enough to provide expensive universal subsidies.
Chancellor Rachel Reeves has made it clear that the Government is not in a position to repeat the £70 billion energy bill subsidies offered to all households following the energy shock caused by Russia’s invasion of Ukraine.
“I will not repeat that same mistake,” she wrote in The Sunday Times, adding that ministers “should respond” to the costs the war in Iran would impose on both families and businesses.
Later this week, Reeves added, she would set out principles that would “guide how we support businesses” that will also feel the impact of rising energy bills in the coming months.
So far, the government has provided only limited help to rural households dependent on heating oil, while at the same time strengthening the powers of the Competition and Markets Authority to stop any price gouging.
Drivers have already scaled back their purchases at the pump due to the rise in fuel prices, leaving less in the tank with each transaction, official data shows.
The new inflation shock creates a difficult situation for British households, which are already facing rising tax bills, slowing wage growth and a weakening labor market. The Office for Budget Responsibility’s budget watchdog said in March it expects household disposable income to rise an average of just 0.5 percent per year for the rest of the decade.
Many homeowners are also coming to the end of fixed rate mortgage deals and are now likely to face higher borrowing costs on top of these pressures as hopes for rate cuts from the Bank of England have faded.
A monthly survey of recruiters by KPMG and the Recruitment & Employment Confederation, also published on Monday, showed a continued slowdown in hiring in March. The permanent placements index – the survey’s main measure of hiring activity – remained at 49.2 in March, below the reading of 50 that would indicate unchanged activity.
At the same time, many agencies reported that more candidates were applying for jobs because their previous employer had resigned following cost cuts or restructuring.
Recruiters have been reporting a decline in the number of vacancies for almost three years, with the latest research from KPMG/REC showing particularly sharp declines in low-wage sectors such as catering and retail, healthcare and administrative professions.
Even in the public sector, where staff are generally better protected from cyclical downturns, job losses are widespread. Unison, one of the main unions representing NHS workers, said on Monday that freedom of information requests have revealed plans to cut at least 21,000 roles at NHS trusts across England, including at least 3,600 clinical roles, by freezing recruitment, reducing the use of temporary workers and restructuring.
Data visualization by Amy Borrett
