British households are only halfway through a two-year cost-of-living crisis, with average incomes likely to fall by more than £2,000, a leading think tank has warned.
According to the Resolution Foundation, the typical disposable income of working-age households is on track to decline by 3% this financial year and by 4% in the year to April 2024.
Only the richest will see incomes rise, according to the think tank’s annual living standards outlook to 2023, while middle-income households will struggle to make ends meet after an average loss of £2,100.
The warning comes amid a rash of strikes by workers demanding pay rises closer to the average inflation rate of 10.7%.
A vote by teachers is expected to support strike action when the results of the vote are announced in the next fortnight, adding more than 500,000 public sector workers to a tally that includes nurses, Whitehall officials and staff the Border Force.
A meeting scheduled for today between the prime minister and the unions could move a step closer to a deal with the nurses, but union officials have said it is unlikely to redress the grievances of most public sector workers on the way to endure a significant cut in living standards.
The think tank said that while the headline rate of inflation was likely to fall over the coming months in response to falling international gas and petrol prices, the cost of living would remain very high for in many homes.
Energy bills are expected to rise following “the thinning of government support”, taking the typical energy bill from £2,000 in 2022-23 to £2,850 in 2023-24.
The fall in the cost of wholesale gas is likely to reduce the cost to the Treasury of government energy subsidies aimed at businesses and households, but long-term contracts covering the supply of gas to the households keep retail prices high for at least the rest of the year.
Freezing income tax thresholds will also increase the tax bills of an average household by around £700 from April, while rising mortgage costs will lead to a 12% fall in real income over a two-year period for the 3 million households forced to refinance their mortgage loans.
The estimated 7% drop in living standards over two years is worse than the post-financial crisis crackdown, which saw a 5% drop between 2009-10 and 2011-12.
“When combined with a weak recovery from 2024 onwards, [it] would leave typical household incomes still below pre-pandemic levels even in 2027-28,” the report said.
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Lalitha Try, a researcher at the foundation, said low-income families were more likely to suffer in their financial circumstances and health.
He praised the government for providing “targeted support to vulnerable households”.
Over the course of the two-year crackdown, the real incomes of the poorest fifth of households will fall by 4%, compared to 9% of households in the top 5-10% (second highest income bracket high) of workers.
However, the richest 5% of society will be better off after sharp increases in interest rates that have already increased the return on savings and investment.
“This means they alone will see their typical income rise by 4% between 2021-22 and 2023-24,” the report said.