The UK’s most vulnerable families and pensioners face an 18-month-long squeeze on incomes as benefits fail to keep pace with a surge in the cost of living, economists have warned.
The speed of price growth is set to peak at close to 5 per cent in spring next year and remain high for the next two years according to the Bank of England and government spending watchdog, the Office for Budget Responsibility.
It means people on benefits will have to wait for the lagging state pension and universal credit to catch up with surging inflation.
As pressure grows on the chancellor to ease the burden, Baroness Altmann, Conservative peer and former pensions minister, said the pressure would be felt disproportionately by the less well-off.
“I do worry that the lives of older people who don’t have huge wealth don’t seem to matter,” she told The Independent. “Policies have been introduced that seem to favour those older people who are already well-off and have taken money away from those who can least afford it.”
She added that pensioners were especially exposed to inflation, as poorer retired people spend a greater share of their income on “basic essentials” which have shot up in price.
This year, the 3.1 per cent increase in benefits planned for next spring is in line with the consumer price index’s (CPI) reading in September, despite the most recent data for October showing that inflation was at 4.2 per cent.
This now is also the case for the state pension, after the government said it would break the so-called triple lock, which would have increased it by whichever was highest out of earnings, inflation or 2.5 per cent.
Mr Sunak has been urged to use part of the saving made from cutting the £20-per-week universal credit uplift to address the energy-induced crisis in the cost of living.
Mike Brewer, chief economist and deputy chief executive of the Resolution Foundation, said: “He could spend some of the money he saved from £20-per-week on energy-specific measures, whether that be the warm homes discount or cold weather payments.
“We’re also in a for a year or several months of stagnating real wages too.”
Guaranteeing the triple lock was a key Conservative manifesto pledge, but was put on hold in September for a year.
Analysis by the Liberal Democrats suggests the move could leave pensioners £2.6bn poorer in real terms next year if the Bank of England’s forecasts for the rate of price growth prove correct, meaning that those on the basic state pension will be £208 a year worse off, while those on the new state pension will be £273 worse off.
Households have already faced months of rising costs and near-stagnant benefits. The inflation-linked increase to universal credit and some other benefits was 0.5 per cent, far below the rate experienced by households in the 12 months to October.
And a slowdown in wage growth throughout 2022 is expected to only be a growing problem for Rishi Sunak, according to the Resolution Foundation. Even in-work households who draw on benefits will feel a squeeze on their budgets through to next winter, as inflation eats through pay growth.
Added to this sorry picture is rising energy bills, said Mr Brewer, with soaring gas prices being one of the biggest drivers in price growth in recent months. They are set to continue to push up households’ costs.
The energy price cap, designed to limit the level at which energy providers can increase bills, could rise by as much as 30 per cent in April next year, according to analysts at research company Cornwall Insight.
Labour’s shadow work and pensions secretary Jonathan Reynolds told The Independent: “This Conservative-made cost of living crisis is set to hammer those who can least afford it.
“The government’s actions should be making life easier, not harder for people this winter, yet instead they have pressed ahead with universal credit cuts, tax hikes and a broken promise on the pensions triple lock. Labour would ease the burden by cutting VAT on energy bills to bring bills down immediately.”
Jonathan Cribb, senior research economist at the Institute for Fiscal Studies told The Independent that the crisis will just “get harder if inflation climbs further”.
Unexpected inflation spikes are particularly bad for those on fixed incomes, he added.
The chancellor said in response to Wednesday’s inflation rise that many countries were experiencing higher inflation, and that the government was helping people to improve job prospects by allowing universal credit recipients to earn more money before losing some of their benefits.
“We are also providing more immediate support, including through the £500m household support fund for the most vulnerable families, fuel and alcohol duty freezes, and the energy price cap,” Mr Sunak said.
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