2022 is set to be the “year of the squeeze” as inflation cancels out pay growth and families are hit by higher taxes and soaring energy bills, a leading think-tank has warned.
The Resolution Foundation forecast that average earnings will be just 0.1 higher at the end of next year than they are now, thanks to the effect of inflation which is expected to hit 6 per cent in the coming months.
The think-tank highlighted April as a key moment when living standards will be hit, with the average household losing £1,200 due to new taxes and a large increase in the energy price gap, driving by soaring costs in the global gas market.
Chancellor Rishi Sunak should act to reduce the effect of the cost-of-living squeeze, the Resolution Foundation said, with a focus on spreading the cost of energy so that poorer households are able to afford heating.
Real wage growth has been flat since October and is not expected to grow until the end of 2022, according to the think-tank. It said that by the end of 2024, wages will be £740 a year lower than they would have been if the pre-pandemic trend had continued – unlike in some other countries such as the US where the economic hit of Covid-19 has already been eliminated.
April will see taxes rise as the 1.25 per cent health and social care levy takes effect and income tax allowances are frozen, and is also the month when the energy price cap is reviewed.
The cap could increase by as much as 50 per cent, which would mean costs doubling over the course of a year, and an extra £100 will be added to bills to recoup the cost of rescuing the customers of failed energy firms.
The Resolution Foundation said lower earners would be worst affected by rising gas prices, spending 12 per cent of their income on energy compared to 8.5 per cent now. The richest households will take the biggest hit from the tax increases, with the average cost per family estimated at £600.
The foundation’s director Torsten Bell said: “2022 will begin with Omicron at the forefront of everyone’s minds. But while the economic impact of this new wave is uncertain, it should at least be short-lived. Instead, 2022 will be defined as the ‘year of the squeeze’.
The overall picture is likely to be one of prices surging and pay packets stagnating. In fact, real wages have already started falling, and are set to go into next Christmas barely higher than they are now.
“The peak of the squeeze will be in April, as families face a £1,200 income hit from soaring energy bills and tax rises. So large is this overnight cost of living catastrophe that it’s hard to see how the Government avoids stepping in. Top of the Government’s New Year resolutions should be addressing April’s energy bills hike, particularly for the poorest households who will be hardest hit by rising gas and electricity bills.”