Spring Statement: Living standards to drop by record level as inflation forecast to hit 8.7%

Living standards are to suffer their highest fall on record in the next 12 months with inflation on course to hit almost nine per cent by October, the Office for Budget Responsibility has warned.

An economic and fiscal outlook report published by the OBR in response to Rishi Sunak's Spring Statement highlighted the hit to household budgets is expected to be at the worst level seen in 66 years of record-taking during 2022/23.

A 2.2 per cent drop in real living standards is being forecast.

Hide Ad
Hide Ad

The OBR said measures contained within the Spring Statement have cut the expected fall in living standard by a third of what they would have otherwise have been.

It said: "The public finances have emerged from the pandemic in better shape than expected. But Russia’s invasion of Ukraine will push inflation to a 40-year high of almost nine per cent, and living standards are set for a historic fall over the next 12 months.

"The Chancellor used his Spring Statement to deliver rebates and tax cuts that reduce that fall by a third to just over two per cent and a pair of personal tax cuts that undo one-sixth of the total tax rises he has previously announced. This leaves him with £30 billion of headroom against his fiscal targets."

The report by the OBR, which provides independent analysis of the UK's public finances, said: "As a net energy importer with a high degree of dependence on gas and oil to meet its energy needs, higher global energy prices will weigh heavily on a UK economy that has only just recovered its pre-pandemic level.

Hide Ad
Hide Ad

"Petrol prices are already up a fifth since our October forecast and household energy bills are set to jump by 54 per cent in April. If wholesale energy prices remain as high as markets expect, energy bills are set to rise around another 40 per cent in October, pushing inflation to a 40-year high of 8.7 per cent in the fourth quarter of 2022.

Living standards are expected to suffer a significant drop in the next 12 monthsLiving standards are expected to suffer a significant drop in the next 12 months
Living standards are expected to suffer a significant drop in the next 12 months

"Higher inflation will erode real incomes and consumption, cutting GDP growth this year from 6.0 per cent in our October forecast to 3.8 per cent. With inflation outpacing growth in nominal earnings and net taxes due to rise in April, real living standards are set to fall by 2.2 per cent in 2022-23 – their largest financial year fall on record – and not recover their pre-pandemic level until 2024-25."

The report said the UK is more exposed to higher costs of gas and oil than other European countries, with the impact of international sanctions on Russia hitting global prices.

"The UK is a net energy importer, and despite having a relatively low energy intensity of output, we are highly reliant on gas and oil in our energy mix. Gas and oil together supplied 76 per cent of total UK energy consumption in 2019 compared to a European average of 57 per cent. And while we import little of it directly from Russia (six per cent of our gas and eight per cent of our oil), we pay global market prices for all of it and so, like all net importers of these commodities, face a deterioration in our terms of trade.

Hide Ad
Hide Ad

"Our forecast is based on the average gas and oil future prices over the first week of the Russian invasion between February 24 and March 2, which imply prices fall back sharply from their current multi-year highs, but remain elevated."

Rishi Sunak delivering the Spring Statement todayRishi Sunak delivering the Spring Statement today
Rishi Sunak delivering the Spring Statement today

Mr Sunak's Spring Statement has confirmed the National Insurance increase will go ahead but has raised the point of earnings from which it is charged from the current £9,880 to £12,570. A one-year 5p cut in fuel duty has also been announced.