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10 million households vulnerable to ‘cost of living crunch’

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Written by: Emma Lunn
13/01/2022
Those on low incomes will find it hardest to cope with the surging cost of living because the major benefits go up in line with a lagged measure of inflation, according to a think tank report.

The Institute for Fiscal Studies warned that rising inflation and potential falls in take-home pay this year raise specific issues for benefits policy. 

In April, benefits are set to rise by the rate of general (CPI) inflation in the year to September 2021, which was 3.1%. But according to the latest Bank of England forecasts, inflation in the year to April 2022 is expected to be about 6%. The inflation figure for November 2021 was 5.1%.

The IFS warned that a particular contributor to rising prices in April will be energy costs, with the energy price cap, and therefore energy bills, expected to rise significantly.  

Previous IFS work has shown that lower income households spend almost three times as much of their budgets on gas and electricity as the highest-income tenth on average (11% versus 4%). 

Hence, in April overall inflation facing the lowest-income tenth of households looks set to be about 1.5 percentage points higher than that facing the highest-income tenth. 

The difference in inflation between all households receiving benefits and all other households is more modest, meaning that a 6% uprating of benefits in line with expected overall CPI inflation would, on average, approximately cover the price rises faced by benefit recipients. 

The IFS says the pattern of rising inflation would mean a 3% real cut in benefits year on year. Increasing working-age benefits and Pension Credit for those over state pension age by 6%, instead of the default 3.1%, would cost an additional £3bn in 2022-23. On average it would mean preventing a £290 real fall in benefit income year on year for the 10 million households in receipt of these benefits. 

The IFS also pointed out that it won’t just be people claiming benefits that will struggle with a big rise in energy costs – but households on middling incomes too, especially those with particularly high energy costs. 

Robert Joyce, IFS deputy director said: “We have become used to an era of low and stable inflation. But the way in which we increase benefits each April is not fit for the period of high and rising inflation we now face. 

“Benefits are set to rise by 3.1% – last September’s inflation rate. But by April inflation will be about 6%. So the poorest are heading for a 3% year-on-year cut in their real benefit levels and living standards. It would be preferable to raise benefits by the actual inflation rate in April. 

“If that is 6% it would cost an additional £3bn, or £4.5 bn if the state pension were included. Doing so would compensate benefit recipients on average for higher costs, including energy costs.This need not be a permanent increase. Future uprating can be adjusted once inflation has fallen back.”

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