Sharp Price Rises Push Millions in U.K. Toward Poverty Overnight

(Bloomberg) -- The cost of heating a home, taking a shower or cooking a meal rose to new heights for millions of people in the U.K. on Friday as household energy prices hit a record, days before a payroll tax increase also comes into force.

The overnight surge in living costs, which pushes up the burden on Britons already facing high inflation, will see the average domestic energy bill increase by 693 pounds ($911) over the next year as a result of sharp rises in wholesale prices.

A springtime cold snap blanketed much of the U.K. in frost overnight, with warnings of widespread ice and some snow over coming days. The low temperatures will force many into an immediate choice between heating their homes and managing their stretched household budgets.

Rising costs have united groups across the political spectrum — from the Institute of Directors to the Resolution Foundation — in criticism of Chancellor of the Exchequer Rishi Sunak for not doing more to cushion the blow and of the Bank of England for allowing inflation to race out of control.

In addition to rising energy prices, working Britons will soon find their monthly pay packet has become a little smaller. A rise in the National Insurance tax, officially aimed at refilling health service budgets after the Covid-19 pandemic, will hit families across the income spectrum from April 6.

Overall, the average family will be 1,100 pounds ($1,443) worse off over the next 12 months, according to the Resolution Foundation. That’s in addition to the impact of soaring consumer price inflation, which hit 6.2% in February and is already at a three-decade high. 

In a bid to increase the pressure on Prime Minister Boris Johnson, the opposition Labour Party says the hit to living standards could be even higher, calculating that consumers could be as much as 2,620 pounds worse off when taking the rising cost of staples such as food into account.

The sharp jump in domestic energy costs comes after energy regulator Ofgem raised a cap on prices in the face of a steep and sustained increase in the wholesale gas market, which is now more than six times higher than a year ago. From Friday, customers on a default tariff  could see gas cost 81% more, with electricity prices going up by 36%. On the eve of the price-hike many supplier websites crashed as customers rushed to submit accurate meter readings. 

“This is the biggest energy price shock in living memory,” said Adam Scorer, chief executive officer of fuel poverty charity National Energy Action. “Millions of people will be priced out of adequate levels of heating and power and for all the anticipation of these price rises, many people on the lowest incomes will be crushed by the reality.” 

Many have already found that a winter of rising prices has pushed them to the brink. Resolution estimated on Friday that the number of households in “fuel poverty” — defined as spending at least 10% of income on energy — has doubled to 5 million as a result of the price-cap hike.

While the April pinch point has been looming for some time, Russia’s invasion of Ukraine raised the stakes even further. Food and petrol prices soared and the conflict looks set to push household energy bills even higher later this year. The price cap is estimated to rise by another 50% in October, to about 3,000 pounds, according to Investec Bank Plc.

Sunak faced public backlash last week after his Spring Statement contained few new measures to counter the rising cost of living. Instead, the chancellor announced changes to limit the scale of the National Insurance tax rise and cut taxes on petrol and diesel fuel, suggesting that further measures could be put in place in time for October.

The government also says that 2.5 million U.K. workers will get a pay rise from Friday as a result of increases to the National Minimum Wage and National Living Wage, and has already pledged a 9 billion-pound package of support for energy bills.

“While no government can control the global factors pushing up the cost of everyday essentials, we will absolutely act wherever we can to mitigate rising costs,” Business Secretary Kwasi Kwarteng said in a statement.

Despite that, campaigners say the government is not doing enough. The Joseph Rowntree Foundation accused it of acting “recklessly” by failing to raise benefits in line with inflation. “For people on the lowest incomes, the next few months could be truly catastrophic, as inflation reaches a 30-year high while the basic rate of social security is at a 35-year low in real terms,” Katie Schmuecker, the organization’s deputy director of policy & partnerships, said in a statement.

Hardship and Suffering

The U.K. is now facing the previously unthinkable prospect of double-digit inflation while households are facing a squeeze on incomes that Bank of England Governor Andrew Bailey descrbes as “historic.”

After the financial crisis, Brexit and Covid all brought significant shocks to the U.K. economy, many observers feel the inflation spike is a crisis too far for many poorer households.

Meanwhile, the Bank of England says it can do nothing about the short-term pain ahead, and its interest-rate hikes — designed to bring inflation under control over time — are already pushing up borrowing costs, adding to immediate pressure on budgets. 

“I just worry about the misery, the hardship, the suffering, that is now being caused by a failure to understand that a large section of our population simply cannot afford to turn up their heating. Simply cannot afford the weekly food bill,” former Prime Minister Gordon Brown said in an LBC radio interview this week. 

The situation was bleak for many before the April hikes. With inflation above 6% already, more than eight in 10 U.K. adults reported an increase in their cost of living in March, the Office for National Statistics said Wednesday.

Food, domestic energy and vehicle fuel are the most commonly cited reasons for rising bills, and more than half expected to respond to the pressure of family budgets by spending less on discretionary items. Credit card borrowing in February rose at a record speed, too, more evidence of the strain on everyday household finances.

Turmoil in the energy markets could end up costing consumers even more. U.K. taxpayers could face billions of pounds in costs if the government ends up nationalizing a unit of Gazprom PJSC that supplies about a fifth of the country’s commercial gas. The U.K. is preparing to step in as customers turn their backs on Russian businesses over the war in Ukraine. 

Some are keen for the government to step in to aid struggling people as well as businesses. “For most consumers, it is not a question of waiting until the prices are unbearable. That is already happening,” said Dieter Helm, professor of economic policy at Oxford University and former energy policy adviser to the government. 

©2022 Bloomberg L.P.