Inflation Surge Puts U.K. on Track for the ‘Year of the Squeeze’

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U.K. households are heading into the “year of the squeeze” as surging energy bills and faster inflation eat into incomes, according to the Resolution Foundation think tank.

In a grim report days before the New Year holiday, it said real wages will effectively stagnate in 2022, rising just 0.1%. In three years, they’ll be 740 pounds ($996) a year lower than if the pre-pandemic wage trend had continued.

U.K. inflation has already breached 5% and may hit 6% early next year, the highest in three decades. That will hit consumers already dealing with the ongoing economic fallout from the coronavirus.

In addition to energy prices, consumers will have to deal with tax increases in April. Those include the end of a reduced tax rate on hotels and restaurants -- one of the government’s support measures during virus restrictions -- as well as higher social insurance rates on pay packets.

Resolution estimates the average impact on incomes from higher energy bills will be 600 pounds. Earlier this month, Investec Plc said the total increase for households next year could be 18 billion pounds.

Energy prices won’t be the only burden coming in April. That month will also see tax increases, including the end of a reduced tax rate on hotels and restaurants -- one of the government’s support measures during virus restrictions -- as well as higher social insurance rates on pay packets.

“2022 will begin with omicron at the forefront of everyone’s minds,” said Torsten Bell, Resolution’s chief executive. “But while the economic impact of this new wave is uncertain, it should at least be short-lived. Instead, 2022 will be the ‘year of the squeeze’.”

Describing April as a “cost of living catastrophe,” Resolution said the government must act to reduce energy costs. Among the options it suggests are reducing the increase in the energy cap by compensating suppliers for the difference, and extending the time period to recoup the cost of the company collapses this year.

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