UK households are set to face a hit of £1,200 next year as stalling wages along with rising tax and energy bills are expected to cause a “cost of living catastrophe” in the spring, a leading economic think tank has warned.
According to recent claims by the Resolution Foundation (RF), government measures, including the new social care levy on national insurance and the freezing of the personal income tax allowance, will combine with high inflation and make 2022 the “year of the squeeze”.
The think tank has further warned that the introduction of tax changes, with a new price cap on energy bills, will cost families £1,200 overnight in April.
“The months ahead will not be easy for households who see their wages fall back as energy bills and taxes rise,” the report said. “As Omicron hopefully fades in the early months of 2022, we will come to realise the scale of the challenge posed to household finances.”
UK inflation is touching decade-high levels and as per experts, it will continue to soar in the coming year as well.
Torsten Bell, chief executive of the Resolution Foundation, 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.”
Households have been shielded from rising energy costs until now but the same is expected to change in the coming couple of months as the energy price cap will reportedly be reviewed in February and come into effect in April.
The think tank further added that the increase in the price cap in April would have the biggest impact on low-income households as they spend more of their income on energy. On the other hand, higher-income households will face a bigger hit from the government’s decision to freeze personal tax allowances at £12,570 a year.
The Foundation said wage growth had stalled in 2021 and in real terms wages were likely to fall for most of 2022.
The report called on the government to consider ways to mitigate rising living costs, including raising universal credit, holding down the price cap and temporarily removing VAT on energy bills.
