Social Justice

Inflation predicted to hit 18% for poorest this autumn

A new study finds the scale of the energy crisis means the government would need to spend another £12billion to achieve what it was aiming to do with its cost of living support package announced in May.

Real-terms Inflation is predicted to hit 17.6% for the poorest. Image: Clem Onojeghuo

Real-terms inflation is predicted to hit almost 18 per cent for the poorest in society this autumn.

New figures from the Institute for Fiscal Studies (IFS) show the deepening energy bills crisis will see real-terms inflation reach an eye-watering 17.6 per cent for those on the lowest incomes.

The IFS has warned the government support package announced in May will no longer be enough to support families because the energy crisis has been worse than imagined when the maths was done.

It said Rishi Sunak’s support measures were based on estimates the cost of living would be 9.5 per cent higher this year than last. Had that been the case, the package would have seen real incomes for low-income households broadly maintained, with middle- and high-income households seeing the biggest drop.

But the worsening energy crisis means the cost of living is now expected to reach 11.3 per cent. This means poorer households, who spend more of their budgets on energy, will be hit harder.

This chart shows predicted levels of inflation across all incomes – broken down into quintiles – in October. The poorest will see inflation of 17.6 per cent, while for the richest it will be 10.9 per cent.

The IFS says based on May forecasts, the £400 energy discount and £150 council tax rebate announced by Sunak would have covered around half of the increase in energy costs for a typical family over the year. But if ministers want to maintain that pledge, support now needs to be increased by a further £260 – setting the government back another £7billion.

Similarly, out-of-work benefit recipients looked set to be broadly protected from rising prices thanks to the May measures. But now claimants will see a fall in their real income of £620 over the year. So the IFS says it would now take another £650 grant to protect them, at a cost of roughly £5.5bn.

The thinktank therefore suggests the government would need to invest another £12billion in total simply to achieve what it was aiming to do with its existing £24bn package.

And as the chart shows, it’s not just the poorest who are being hit hard by the cost of living crisis.

“Making no changes to the package currently on offer will leave many households, rich and poor, seeing very significant declines in their real incomes,” the IFS said.

The below chart shows how all income quintiles are now set for real-term income drops this year.

The IFS has used Bank of England forecasts for inflation and earnings and found the poorest household in the chart, the out-of-work single parent, looks set to be about £460 worse off over the year. The median-earner household will find themselves around £760 worse off than last year, and the household with one earner at the 75th percentile will find themselves around £1,440 worse off.

Paul Johnson, IFS Director, said:  “The government is still playing catch up as inflation and the cost of energy continue to spiral upwards. Just achieving what they wanted to achieve back in May will cost an additional £12 billion, and a package on that scale will still leave many households much worse off.

“Given the costs there are genuine and difficult trade-offs here. For both households managing their budgets and the government managing the economy’s finances some clarity on strategy is urgently needed.”

The Big Issue last week backed Gordon Brown’s calls for the government to take urgent action to prevent a “poverty time bomb”. But his demands for an emergency budget and for a Cobra meeting to be called were dismissed by Boris Johnson, whose spokesperson said the problems were “for a future prime minister”.

A petition backing Brown’s campaign has so far been signed by more than 111,000 people.

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