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UK inflation heading for 14% for poorest households

·Business Reporter, Yahoo Finance UK
·3-min read
A homeowner turning down the temperature of a gas boiler as inflation bites
UK inflation: The Institute for Fiscal Studies has warned that the price hikes will disproportionately hit the poorest households. Photo: Press Association

Inflation is likely to increase at a faster pace for the poorest UK households, possibly rising to as much as 14% in October, compared to 8% for the richest families, an economic research body has warned.

It comes as the chief executive of energy regulator Ofgem announced on Tuesday that the default tariff cap is set to increase by another £800 in October, adding to an already sharp cost of living squeeze.

The rise constitutes a 117% increase, more than double, of the tariff cap between October 2021 and October 2022, bringing the average annual gas and electricity bills to £2,800.

"Now, this is uncertain, we are only halfway through our price cap window but we are expecting a price cap in October in the region of £2800," Jonathan Brearley, CEO of Ofgem, told the Business, Energy and Industrial Strategy committee.

"I know this is a very distressing time for customers but I do need to be clear with this committee, with customers and with the government about the likely price implications for October," he added.

Predicted UK inflation. Chart: IFS
Predicted UK inflation. Chart: IFS

In April, the energy price cap already increased by 54%, or nearly £700, per year for the average household.

Analysis from the Institute for Fiscal Studies (IFS) warned on Wednesday that the price hikes will disproportionately hit the poorest households, as they spend a much larger share of their total spending on gas and electricity.

The bottom 10% of households in terms of income spend on average almost three times as much of their budgets on gas and electricity compared to the highest-income tenth (11% compared to 4%).

Read more: How to cope with bills out of the blue when you really can’t afford it

In April, the bottom 10% of the population in terms of income faced an inflation rate of 10.9%, which was 3 percentage points higher than the inflation rate of the richest 10%.

The IFS cautioned that this pattern was set to continue. “A more than doubling of prices of gas and electricity will further increase the difference in the rate of inflation experienced by richer and poorer households,” it said.

“Assuming an average rate of inflation of 10%, as currently projected by the Bank of England, the analysis suggests that the poorest households may face average inflation rates of as high as 14%, compared to 8% for the richest households.”

The cap covers consumers on standard variable energy tariffs, rather than fixed tariffs, equating to around 22 million households.

Almost 10 million households could find themselves in “fuel stress” this winter if the price cap rises to around £2,800, according to the Resolution Foundation.

It suggested the number of families living in fuel stress – defined as spending at least a tenth of their total budgets on energy bills alone – would rise from 5 million to 9.6 million.

Read more: How to save hundreds of pounds on your energy bill

"The inflationary pressures post-pandemic is a massive concern, with no immediate signs of slowing. Global material, supply chain costs and the unprecedented energy prices continue to rise," Aaron Hawkins, senior audit manager at MHA MacIntyre Hudson, said.

"What is the solution for hard-pressed families especially at the lower end of household income? The only answer can be central government support.

"The chancellor exceeded expectations during the pandemic with a generous furlough scheme. There is now overwhelming pressure on him to do show the same level of support through the tax system - perhaps it’s a good time to reconsider the 1.25% national insurance increase?"

He added: "But…here is the golden question. How to pay for the assistance given throughout the pandemic and now the cost of living proposals? A windfall tax on energy companies now seems inevitable, but this is unlikely to be enough. Whatever the support, it will need to be paid for by recouping tax in the future.

"The ball is being kicked firmly down the road."

Watch: How does inflation affect interest rates?

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