Soaring food and fuel costs to slow Britain's post-Covid recovery

Soaring food and fuel costs to SLOW Britain’s post-Covid recovery: Record inflation and households spending more on essentials will hit economy… with average energy bills to reach £2,800 by October

  • EY Item Club now expects consumer spending to grow at 5.1% this year, down from previous forecast of 5.6%  
  • Cost pressures and higher prices are set to squeeze consumer incomes, particularly among poorer families
  • Experts think real incomes will fall and inflation will peak at 8.5% next month when energy price cap rises
  • Office for Budget Responsibility says price cap is likely to rise by another 42% in October – increase of £830 

The soaring cost of food and energy in Britain means those with lower incomes will be spending more of their money on these essentials, experts say amid forecasts that electric and gas bills could hit £2,800 by October.

EY Item Club analysts said they now expect consumer spending to grow at 5.1 per cent this year, down from the 5.6 per cent expected in a February forecast. The 2023 forecast is now at 1.7 per cent, down from 2.9 per cent.

Economists believe cost pressures and higher prices will squeeze consumer incomes, particularly among poorer families – and spending will transition from goods towards services after the final Covid-19 restrictions were lifted.

But they also said that Britons at the lower end of the income scale are ‘likely to face a greater squeeze as they spend more of their income on energy and food, the two products most affected by the war in Ukraine’.

In addition, the EY experts think real incomes will fall this year and that inflation will peak at 8.5 per cent next month when the energy price cap rises for the typical household by about £690, or 54 per cent, to £1,971 a year.

And costs are likely to rise further, with the Office for Budget Responsibility saying the price cap is likely to rise by another 42 per cent in October – a record increase of £830, taking the average annual bill above £2,800.

EY also believes that inflation will only fall back to around 6 per cent by the end of this year – but warned that ‘the potential for another increase in energy prices in October means risks are to the upside’.

In the EY Item Club’s ‘Interim Forecast and Special Report on Consumer Spending’ published today, the group’s analysts said that ‘having entered in 2022 in good shape, the outlook for the UK economy is now cloudier’.

They added: ‘It is an understatement to say that the 2020s have been eventful, with considerable uncertainty around how events could play out. The EY Item Club will revisit GDP growth in its spring forecast at the end of April, but it is fair to say the risks are very much weighted to the downside.’

Nearly half of children in low-income households ‘worry about finances’ 

Nearly a third (30%) of children worry about their family having enough to live on comfortably as the cost of living crisis deepens, according to a charity.

Action for Children commissioned surveys of more than 5,000 adults and children aged as young as 11 to explore the biggest issues affecting childhood.

Nearly half (47%) of children surveyed from low-income backgrounds (where the household annual income was less than £20,000) said they worry about their family’s finances, compared with one in seven (14%) children from high-income families (where the household income was more than £70,000 annually).

The Office for Budget Responsibility (OBR) said last week that households are facing the biggest squeeze in living standards since records began in 1956-57.

Action for Children said that, two years on from the first national lockdown, mental health was now a much bigger worry for children, with less than a third (29%) of children seeing their own mental health as an issue in 2019, compared with 42% in 2022.

Covering up a worry is common for children, the research suggested, with nearly six in 10 (57%) hiding worries from their parents.

Parents appear to be in tune with this, with 60% believing their child keeps their worries hidden.

Over a third (38%) of children believe they will have a brighter future than their parents.

More than half of parents (56%) and grandparents (52%) feel too much time spent on devices and social media make it more difficult for children to fulfil their potential – but only a third (33%) of children agree.

The findings were published as Action for Children launched its new ‘star in every child’ campaign to help its workers deliver support to vulnerable children.

Imran Hussain, director of policy and campaigns at Action for Children, said: ‘Day in, day out our frontline staff support children grappling to see how they fit into our complex world – navigating big issues including financial worries, climate change and the pandemic.

‘Sadly, since we conducted our research, intensifying money worries and the war in Ukraine will leave children feeling the world is a gloomier place.

‘The likely fall-out of the Ukraine conflict with even higher energy bills and inflation rates not seen for a generation is a double blow for low-income families already locked in a crippling cost-of-living crisis.

‘The pandemic also continues to hang heavy, and its impact will be felt long into children’s futures.’

A Government spokesperson said: ‘The latest official figures show there were 300,000 fewer children in poverty after housing costs than in 2010 and we continue to provide extensive support to reduce this number further, recognising the pressures people are facing with the cost of living and providing support worth £22 billion this financial year and next to help.

‘This includes putting an average of £1,000 more per year into the pockets of working families via changes to universal credit, cutting fuel duty and helping households with their energy bills through our £9.1 billion Energy Bills Rebate.

‘We’re also boosting the minimum wage by more than £1,000 a year for full-time workers and raising national insurance thresholds so people across the UK will keep more of what they earn before they start paying tax, while our £1 billion household support fund is helping the most vulnerable with essential costs.’

The experts also said that businesses ‘should think in terms of scenarios rather than forecasts. In particular, they should consider likely paths of inflation and how this might play out through supply and demand lenses’.

Companies are being advised to assess cost pressures across business and product portfolios and understand any available ‘headroom’ on margins – while also considering the ‘positioning of products across income groups, and the likely pricing sensitivity of the consumers, is a priority to identify ‘pain points’.’

The experts added that there will be ‘some shifts in consumer behaviour’, with some types of consumer spending such as holidays or meals out which would ‘perhaps be reined in’ during a normal downturn. They said these ‘may now be further up consumers’ hierarchy of essentials, given the last two years’ restrictions’.

And the analysts concluded: ‘The outlook over the next few months will be a complex picture and staying close to the customer and understanding evolving pressures and preferences will be essential.’ 

The EY Item Club has also downgraded its 2022 UK gross domestic product (GDP) growth forecast to 4.2 per cent from the 4.9 per cent expected in February’s Winter Forecast. GDP growth of 1.9 per cent is forecast for 2023, down from 2.7 per cent.

It added that inflation is now expected to peak at 8.5 per cent in April – the highest level since 1982 – rather than the 7.2 per cent the group had forecast in February.

The experts also pointed out that the 54 per cent rise in typical home energy bills next month means lower-income households could experience an inflation rate of around 10 per cent.

EY’s UK Chair Hywel Ball said: ‘The UK economy entered 2022 in good shape, but the weaker outlook now reflects an assumption that energy prices will be higher for longer, adding to the cost of living and inflationary pressures already weighing on businesses and households.

‘UK consumers will benefit from some protection from the most recent increases in gas prices, with the energy price cap preventing these from feeding through into bills until October. 

‘Businesses don’t have access to the same support though and also face rising capital goods prices, further disruption to their supply chains, and prolonged uncertainty. These factors will inevitably pare back the expected post-pandemic bounce back in business investment.’

EY also forecasts that average pre-tax pay will increase by around 4 per cent over this year, which will be significantly behind the average inflation rate of 6.5 per cent. 

Benefits payments are due to rise by 3.1 per cent in April, which means those with lower incomes will also face increased cost of living pressures. 

Martin Beck, chief economic advisor to the EY Item Club, said: ‘With the worst of the pandemic seemingly behind us – and with restrictions on activity eased – we expect to see consumer spending starting to rotate back towards services rather than goods. 

‘This will pose challenges for some goods sectors, particularly those for which low-income household spend is relatively more important, such as household appliances, books and newspapers, and toys, games and hobbies. 

‘By contrast, sectors which rely more on high-income household spend – including hotels and accommodation, and vehicles – look better-placed to weather economic pressures.’ 

It comes as Rishi Sunak could be forced to deliver another council tax rebate amid growing panic in Government over the impact of the cost of living crisis.

The Chancellor is considering the fresh intervention just days after the tax and duty cuts announced in his Spring Statement were dismissed as insufficient to help families struggling with soaring shop prices and utility bills.

He gave a rebate of £150 to millions of people in council tax bands A to D last month, as well as a £200 loan towards energy bills. 

But the move could have to be repeated later this year as the energy price cap is predicted to reach £2,800 in October – more than twice what it was a year earlier.

NHS could lose valuable staff to higher paid jobs in private firms, says union 

The NHS is in danger of losing thousands of vital staff because of stiff competition for workers from high-street firms, a leading union is warning.

Unison said that without significant pay increases, 999 call handlers, healthcare assistants, medical secretaries and cleaners were being tempted to switch to the private sector.

Supermarkets, coffee shops and logistics firms? are among those promoting wages higher than the lowest hourly rates in the NHS, according to Unison.

Drivers in particular can command higher rates of pay if they move to a private company, it was suggested.

Golden hellos worth £1,500, overtime supplements of an extra £2 an hour and staff discounts are among incentives being offered, it was revealed.

Unison warned that an exodus of NHS workers to the private sector would be ‘disastrous’ for the health service amid an ongoing staffing crisis. 

NHS staff should be getting their 2022 pay rise ?at the end of this week, but delays had led to a ‘frustrating wait’ until later in the summer, said Unison.

The union is calling for an above-inflation pay rise, the voluntary real living wage of between £9.90 and £11.05 an hour as the minimum rate across the NHS, and other urgent measures to retain staff.

A Treasury source said: ‘Council tax is the best way to do it. You’ve got an existing mechanism. You don’t need to set up a whole new system.’

Mr Sunak is under renewed pressure after special advisers were warned that inflation is now the biggest worry for households.

‘The cost of living issue is a train about to hit us,’ according to one source following the Friday briefing with the Prime Minister’s new deputy chief of staff David Canzini.

Yesterday Education Secretary Nadhim Zahawi admitted the Chancellor may have to do more to help families at risk of falling into poverty, telling Sky News Mr Sunak will ‘keep an eye on’ it.

However he pointed out that the Government had spent £400billion in response to the pandemic and another £22billion on energy bills and benefits help this year.

As the Daily Mail revealed on Saturday, ministers have been told to come up with ways to ease the crisis. One idea is to delay the outlawing of buy-one-get-one-free offers on junk food and drink – which had been due in October.

Blue Collar Conservatism, a Tory pressure group representing working-class voters, has welcomed a possible delay. 

Chairman and former Cabinet minister Esther McVey said: ‘Top-down bans from Whitehall on cheaper products in shops at the height of a cost of living crisis is tin-eared and nonsensical. Government should focus on doing fewer things better, for less.

‘The biggest bill all of us face at the moment is the Government itself with the amount of tax we pay – and that’s going up in April.’

Labour analysis also shows older people will be hit by the biggest cut to the state pension in 50 years in the coming financial year, predicting its value will fall by £427.

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