British workers will suffer the biggest drop in take-home pay on record, the Bank of England has warned, as record energy prices drastically eat into living standards.
The Bank’s latest forecasts show a 3.75 per cent squeeze in labour income after tax this year, worse than a projected 2 per cent fall made in February, and the biggest since records began in 1990. This measure of take home-pay makes up about two-thirds of household income, the Bank said.
The poorest families will be worst hit as they spend a higher proportion of their salaries on surging energy costs and more expensive food. Richer families with higher savings accumulated during the pandemic may be better placed to cope with higher inflation in the coming year, the Bank said.
“I recognise the hardship this will cause for many people in the UK, particularly those on the lowest incomes,” Andrew Bailey, the governor of the Bank of England, said today after policymakers lifted rates to 1 per cent, their highest level since 2009.
The war in Ukraine has exacerbated energy price inflation, driving up global crude oil, natural gas and commodities costs after western sanctions on Russia.
Families’ overall household income will also contract 1.75 per cent this year, the second largest fall since equivalent records began in 1969, the Bank said. The only year that was worse for households was 2011, in the midst of the UK government’s austerity policies after the financial crisis.
UK inflation is on course to peak at 10.2 per cent this year after the energy regulator Ofgem lifts its price cap by about 40 per cent in October. This will lead to average household energy bills of £2,800, according to the Bank’s forecast. It means that households will be spending about 8 per cent of their disposable income on energy, electricity and petrol bills, the largest proportion since the mid-1980s. For lower-income households, that share is upwards of 10 per cent.
Bailey said monetary policy was not the best policy tool to counteract a dramatic drop in living standards caused by price shocks from the war in Ukraine. The UK cabinet last month discussed emergency options to help cushion the blow for households, including ideas such as reducing tariffs on food imports and cutting annual requirements for vehicle MOT checks.
Despite surging inflation, worker pay will not increase in line with higher prices, with wage growth peaking at 5.75 per cent this year. That is just under half the projected average of double-digit inflation.
Wage growth accounts for only about a fifth of domestic inflation and Bailey said policymakers were “concerned” that higher pay in the future could keep inflation elevated for much longer than the Bank expects.
“It’s those with the least bargaining power and those that are least well off who will suffer the most,” Bailey said. The governor, who in February urged workers to adopt “restraint” when asking for pay rises, said he would forgo his own 1.5 per cent annual increase on his £575,000 salary this year.
