Finance

As inflation hits 30-year high, UK households start to buckle

  • Households facing biggest income hit in 30 years
  • Inflation set to top 7% in April
  • BoE calls for pay restraint
  • Many families rein in spending on non-essentials
  • Some economists think squeeze will end next year

ASHFORD, England, Feb 22 (Reuters) – After work in the evenings, Nicola Frape turns off the heating and huddles under a blanket with her daughter and a hot water bottle. Adding a layer costs nothing, she says, but leaving the boiler on drains her inflation-hit bank account.

Treats such as cinema tickets have been scrapped as the 38 year-old care worker’s food and fuel bills climb, and she has tried to cancel her pay-TV service but cannot get through to her provider: she assumes everyone is doing the same thing.

Frape is one of millions of normally financially comfortable Britons who are facing a cost-of-living crisis as a double whammy of accelerating inflation – driven by soaring energy bills – and tax increases kicks this year.

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Fast-rising prices are in conflicting what the Bank of England says will be the biggest one-year fall in disposable income, adjusted for inflation, in at least 30 years.

After a decade of stagnant living standards – and in stark contrast to promises of a high-wage economy by Prime Minister Boris Johnson – Frape, like others, is bracing for a further hit to her finances in April.

That is when energy bills are due to jump 54% to around 2,000 pounds ($2,723) a year per household – only some of which will be offset by emergency government support – and when social security contributions paid by workers are also due to increase, all against the backdrop of rising interest rates.

Frape says spending on food and petrol has already risen by 20 pounds a week. She and her 14-year old daughter have had to limit car journeys to help accumulate some savings for April. The little flags pinned to a wall map that show their previous holiday destinations are unlikely to be added this year.

“There’s just too much going up at once,” Frape told Reuters in her immaculate home in Ashford, a town in south-east England, not far from the entrance to the Channel Tunnel. “The pressure is just going to be even worse in April.”

INFLATION’S CLIMB

With economies around the world rebounding from coronavirus lockdowns, prices for everything from food and clothes to haircuts and rent, as well as energy are going up, fueled by resurgent demand and shortages due to supply chain disruptions.

Accurate national comparisons of changes in living standards are hard to make but concerns about inflation are emerging as a big factor in elections including France’s presidential race in April and US midterm elections in November.

Britain’s consumer price inflation rate hit 5.5% in the 12 months to January, the highest since 1992 when the economy was feeling the after-effects of a late-1980s spending boom driven by Margaret Thatcher’s tax cuts and big pay deals.

The CPI is set to top 7% in April. The BoE thinks it will then start to slow but will still be above 5% in a year’s time.

Inflation in the United States has already surpassed 7% to reach its highest since the early 1980s, and in the euro zone it hit a record 5.1% in January.

Frape, who works as a housekeeper in a care home and has been in the industry since she was 18, is being urged by colleagues as their union representative to demand a pay rise above April’s government-mandated 6.6% increase in the minimum wage.

Wage demand pressure, and the risk that it drives a self-perpetuating high inflation problem, is a big worry for the BoE.

Governor Andrew Bailey drew howls of protests from unions this month when he called for restraint in pay talks.

The BoE thinks underlying wage growth will hit almost 5% this year before easing.

Lower-income households are feeling the inflation pinch harder than higher earners, many of whom made big savings during the pandemic on commuting, holidays and going out.

The National Institute of Economic and Social Research, a think tank, estimates the combination of April’s payroll tax increase and higher inflation could drive a 30% rise in destitution in the world’s fifth-largest economy.

The Trussell Trust, which supports a network of food banks, said delivery of food parcels rose 11% between April and September last year compared with the same period of 2019, and hit one of its highest ever levels in December.

At Dad’s House, a food bank in west London, some people who used to donate are now among the 500 families who get support each week. Jackie Gordon, 52, said she often goes without food. “I have to pay my bills,” she said. “I’m behind with my rent and I don’t want to get evicted.”

SHARP BUT SHORT?

The government is hoping to squeeze the cost of living, while sharp, will be short-lived.

It will spread some of the fuel price increase over the coming years and cut a tax for people in lower-value properties to provide support through 2022.

Capital Economics believes household disposable income, adjusted for inflation, might recover as soon as early 2023 as inflation drops more quickly than the BoE expects and unemployment remains lower.

The consultancy forecast a peak-to-trough fall in real wages of 2.6% between September 2021 and April 2022 compared with a drawn-out drop of 13.5% after the global financial crisis as wages rose by less than inflation between 2008 and 2014.

But Rebecca McDonald, senior economist at the Joseph Rowntree Foundation, which campaigns on poverty issues, said 2022 was likely to leave a lasting mark on poorer households even if inflation falls sharply.

“It’s going to feel like a much more longer-term issue because this year is going to be incredibly difficult,” McDonald said, predicting many families would resort to debt or going into arrears this year.

Frape said she was routinely checking her bank balance after the strains on her budget intensified earlier this year. The extra outlays keep on coming: her daughter’s annual bus pass is expected to rise by 80 pounds, or more than 20%.

She works three days a week but said she would lose income from tax credits if she worked longer hours. Frape says her cautious approach has served her well for now, although it underscores why so many retailers and hospitality outlets expect a torrid 2022.

Soon, she said, the government will need to go further.

“I think it’s a really sad situation that people are struggling to live. They’re working so many hours and draining themselves and still can’t make ends meet,” Frape said. “Something’s got to give.”

($1 = 0.7346 pounds)

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Additional reporting by Lucy Towers; Writing by Kate Holton and William Schomberg; editing by Guy Faulconbridge and Emelia Sithole-Matarise

Our Standards: The Thomson Reuters Trust Principles.

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