Brits facing 'income recession' amid cost-of-living crisis, experts warn

LONDON, UNITED KINGDOM - MARCH 20, 2022: Chancellor of the Exchequer Rishi Sunak arrives at the BBC Broadcasting House in central London to appear on the Sunday Morning show hosted by Sophie Raworth on March 20, 2022 in London, England. Chancellor Rishi Sunak is set to deliver the Spring Statement at the House of Commons on Wednesday 23 March amid surging cost of living and energy crisis. (Photo credit should read Wiktor Szymanowicz/Future Publishing via Getty Images)
Brits could be facing an "income recession" even if the UK economy avoids a full recession, an expert has warned.

Brits are facing an "income recession" amid the escalating cost-of-living crisis, experts have warned.

Soaring inflation, which could hit 9% in the coming months, has been driven by a sharp increase in energy bills, as well as rising food and transport costs made worse by the war in Ukraine. The prices of other everyday goods and services are also on the rise.

At the same time, wages are failing to keep pace with such steep inflation and, coupled together, means an enormous strain is being placed on household bills.

Now, Brits are being warned that - even if the UK manages to avoid tipping into an actual recession in the coming months - the nature of the current crisis means millions could find themselves hit just as hard by the impact of what experts have branded an "income recession"

"Even if we don’t get a technical recession what we’re essentially having is an income recession, driven by what’s happening on the inflation side," James Smith, research director at The Resolution Foundation think tank, told Yahoo News UK.

Read more: 'No historical parallel': Labour says Britons are facing worst ever cost of living pressures

"So, even absent a recession, it will still be essential for the chancellor to act in order to cushion families - particularly low-income families - from what could be the tightest cost-of-living squeeze Britain has seen since the 1970s.”

Shoppers walk past closed down shops in Sheffield, South Yorkhire. Photo credit should read: Tim Goode/PA Wire.
Shoppers walk past closed down shops in Sheffield, South Yorkhire. Photo credit should read: Tim Goode/PA Wire.

The Resolution Foundation says rising inflation is likely driving a 4% fall in real incomes, worth £1,000 for a typical earner, making it the sharpest living standards squeeze in half a century.

“On recession risks, we’re seeing from the slow yield curve and financial signalling that market systems are worried about the risk of inflation," Smith added.

"Our own model suggests that risk, or the perceived risk at least, is at its highest level since before the financial crisis."

The think tank says that low-income families are likely to be hit hardest by a second inflation spike set to come this autumn.

Amrita Sen, director of research at Energy Aspects, told MPs in parliament last week that the current risk of the UK tipping into recession is "very, very high".

Earlier this month Paul Johnson, director at the Institute for Fiscal Studies (IFS), warned a failure by the chancellor to introduce urgent economic interventions to protect households from the cost-of-living crisis could result in the "biggest hit to their living standards since at least the financial crisis".

File photo dated 03/02/22 of a homeowner turning down the temperature of a gas boiler, as E.ON's UK boss Michael Lewis (not pictured) said the Government must focus on getting the UK off the gas grid and improve energy efficiency to reduce energy bills, following Ofgem's announcement the price cap will rise 54%.
Ofgem said it was hiking the price cap by 54% from 1 April due to soaring costs for wholesale energy, increasing the typical households annual bills by £693 to £1,971. (PA Images)

In February, Sunak announced an "energy rebate scheme" worth £350 in response to a 54% increase in the energy price cap from 1 April that will increase typical households energy bills by £700.

However, campaigners have urged the chancellor to go even further. On Wednesday, consumer champion Martin Lewis warning Brits were facing "fiscal punch in the face" and urging action from Sunak.

When asked by MPs in parliament on Tuesday what the government needs to do to help ahead of his Spring Statement, Lewis had a simple message: "To give them more money. And it really is as simple as that."

Read more: UK households face enormous £43bn hit after Russia's invasion of Ukraine

Labour has criticised the government, claiming it has let the cost-of-living crisis "spiral out of control".

The shadow Chief Secretary to the Treasury, Pat McFadden, said: "The Conservatives should halt their National Insurance hike in April – and they must look again at Labour’s proposal for a one-off windfall tax on oil and gas producers to cut household energy bills by up to £600."

Watch: Spring statement: From fuel prices to energy bills - what to expect from the chancellor's announcement