UK faces biggest income squeeze since the 1970s on Ukraine war

UK households are facing the biggest fall in living standards for half a century as Russia's invasion of Ukraine deepens the cost of living crisis, according to the Resolution Foundation.

Soaring oil and gas prices triggered by the war could see inflation exceed 8% this spring, the research group said in a report published Tuesday. That will cause typical incomes to drop by 4% in real terms, or around 1,000 pounds ($1,300), in the coming financial year.

"This is a scale of fall only previously seen around the recessions of the financial crisis, early 1980s and mid-1970s," wrote economists Adam Corlett and Lalitha Try.

With taxes and energy bills already set to rise in April, the Ukraine crisis will worsen a squeeze that is hitting low- and middle-income households disproportionately. Inflation is far exceeding wage growth and could rival the 8.4% reached in 1991, according to the Resolution Foundation. 

The scars will be felt for some time, as, barring a "considerable improvement" in the outlook for productivity and wages, the typical household income in 2025-26 will be lower than in 2021-22, its said. Additionally, Resolution predicts that the proportion of children living in absolute poverty is set to be higher in 2026-27 than it was at the start of the decade, something it said has "never seen before in modern Britain."

With the Bank of England raising interest rates in a bid to bring inflation back to the 2% target, Resolution called on Chancellor of the Exchequer Rishi Sunak to help address the crisis in his Spring Statement on March 23. 

Sunak should front-load increases in benefits, which are linked to inflation, by delivering larger rises this year and smaller gains in 2023, to help smooth out the impact of soaring prices on the poorest households, the Foundation suggest.

Resolution's findings came as two other reports warned of the impact the cost of living crisis may have on UK household spending.

While the British Retail Consortium said February saw the value of retail sales increase 6.7% from a year earlier, Chief Executive Helen Dickinson warned "the future is looking increasingly uncertain, with current demand unlikely to be sustained." 

Meanwhile Barclaycard, which reported a 13.7% rise in spending in the month compared with February 2020, said households were becoming less optimistic about their finances.

"Consumer confidence, falling in recent months, will likely tumble further against the backdrop of the current geopolitical events," Dickinson said. "With households facing lower disposable income, discretionary spend will be one of the first things to feel the squeeze."

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.