Households face historic fall in living standards

The latest UK economic outlook from PwC predicts inflation will hit 8.4% later this year.

PWC says that the rise in living costs will wipe 2% off household incomes, equivalent to about £900 or as much as £1,300 for the poorest families. If the Ukraine crisis worsens, inflation could peak at 11%.

It is predicted that the economy will grow at a slower-than-expected rate of 3.8% in 2022, down from the 4.5% previously expected and last year’s record 7.4% expansion, the report suggests. Nick Forrest, UK economics consulting leader at PwC, said: “It is clear that many households and businesses will be feeling great pressure from rising costs this year. Were further sanctions introduced in response to pressure to rapidly curtail the use of Russian oil and gas, the UK economy would continue to grow but the pace of growth would be significantly slowed. The UK is not yet facing a growth crisis, but it is facing an inflation crisis.

At present, the increased inflationary outlook is set to contribute to pressures on UK households, with energy prices rising from 1st April, with the potential to rise again in October when the price cap is reviewed. It is predicted that there could be a fall in real wages of 2% in 2022 as inflation outpaces wage growth, and could leave the average UK household £900 worse off this year.

Nick Forrest, UK Economics Consulting Leader at PwC, said “Beyond the tragic humanitarian impacts of the war in Ukraine, there are wider economic consequences, as Russia and Ukraine are key exporters of commodities such as car batteries, food and fertiliser. Russia is also a major energy supplier. It is clear that many households and businesses will be feeling great pressure from rising costs this year.”

“Were further sanctions introduced in response to pressure to rapidly curtail the use of Russian oil and gas, the UK economy would continue to grow, but the pace of growth would be significantly slowed. The UK is not yet facing a growth crisis, but it is facing an inflation crisis.”

CPI inflation reached 6.2% in February 2022, the highest level in three decades, with around half of the contribution to the headline inflation being driven by fuel, food and electricity prices. Yet PwC’s analysis expects inflation to average 7.4% in 2022 in its main scenario, with a peak of around 8.4%.

Barret Kupelian, senior economist at PwC, said “Households and businesses were already facing significant cost of living pressures before the Russian invasion. These will continue to intensify in the coming months. We expect real wages to contract by an average of at least 2% this year, as inflation continues to outpace wage growth.”

“Food and energy price hikes typically act like asymmetric tax hikes on households as its users cannot materially cut back on its consumption. Our current projections show UK households will be around £900 worse off this year. Those on the lower end of the earnings scale will be impacted by an even larger amount, around £1,300, as they are more vulnerable to price rises for food and energy.”

“This will act as a headwind to economic activity as households cut back on spending in other areas.”

The energy price cap rose by 54% in April 2022, and PwC’s price cap model predicts that it may rise again by around another 36% in October, to £2,700. In the event of economic escalation scenario, it is estimated the cap could rise to £3,500.