Rising prices risk driving a second inflation spike

Rising food and energy prices risk driving a second inflation spike this autumn that could reach over ten per cent for poorer households, according to the Resolution Foundation.

The Catch 2022 report examines the UK’s rapidly evolving economic outlook ahead of the Spring Statement on 23 March, and how the Chancellor might respond to the challenges facing the country. It notes that Rishi Sunak is heading into the Spring Statement with good news on the public finances but terrible news on the family finances.

Borrowing for the current financial year is due to be £30 billion lower than forecast back in October, with tax revenues expected to come in £40 billion higher than forecast.

However, he outlook for the family finances is bleak however, with the Resolution Foundation stating that the conflict in Ukraine means there is heightened uncertainty around the UK’s economic outlook, with the only certainty being that it has deteriorated markedly. The conflict will cause higher inflation – now likely to peak at over eight per cent – which will in turn will cause higher debt repayments for the Chancellor and a deeper income squeeze.

The report says that, while inflation is currently fairly evenly spread across the income distribution, that could change in the autumn as food price inflation continues to build, and rising wholesale energy costs drive another sharp increase in the energy bill price cap in October.

With the poorest tenth of households spending twice the share of their family budgets on food and energy bills compared to the richest tenth of households, the second inflation spike of 2022 in the autumn could reach over ten per cent for these families.

James Smith, Research Director at the Resolution Foundation, said: “Until recently, the Chancellor was approaching his upcoming Spring Statement with good news on the public finances and little pressure to make any big policy calls. Fast rising inflation, exacerbated by the conflict in Ukraine, has changed all this.

“The chances of a living standards recovery this year are receding as rapidly as inflation is rising, and the risk of another recession is looming into view. The Chancellor will therefore need to make some tough, and potentially expensive, choices in how to respond.

“The top priority should be to protect poorer households, who are most exposed to the biggest cost of living crisis Britain has faced in generations. This can be done by increasing benefits by eight per cent, rather than 3.1 per cent as currently planned, in April. The Chancellor cannot protect Britain entirely from the difficult times that lie ahead, but he needs to act urgently to ensure the pain is fairly shared.”