People already struggling after 18 months of Covid now face a bleak winter of rising inflation, food price hikes, benefits cuts and soaring energy bills.
Along with shortages of everyday goods pushing up costs and the end of the furlough scheme this month – amid fears of job losses – experts warn a perfect storm will squeeze households hard.
The Organisation for Economic Co-operation and Development said the problem could last well beyond winter.
It comes after former Brexit Secretary David Davis had warned: “From the point of view of what you might think of as the new Tory voter, the plumber, the bricklayer, the lorry driver, there’s going to be a cost-of-living crisis.”
But Boris Johnson last night buried his head in the sand and denied we will suffer a winter of discontent, despite him slashing Universal Credit and hiking National Insurance contributions, which will hit society’s poorest the hardest.
The OECD predicted inflation could rise to 3.1% next year, a 1.4 percentage point jump from what it forecast in May.
Mr Johnson tried to blame the global economy restarting after the pandemic, but the OECD insisted UK inflation would rise faster and last longer than any other advanced economy and said many problems were specific to Britain.
Even Business Secretary Kwasi Kwarteng admitted there was a looming crisis here.
He said of next month’s UC cut and rising prices: “It’s a difficult situation, it could be a very difficult winter.”
Shadow Chief Secretary to the Treasury Bridget Phillipson laid the blame squarely at the Government’s door. She said: “Working families face a sudden squeeze on living standards on a scale not seen for a generation.
“Incomes are coming down, prices are going up, especially energy prices, taxes are going up, rents are going up, childcare costs are going up, fuel costs are going up, rail fares are up.
“The people of Britain face this not simply by chance, but because of the choices made by Conservative governments, this year, last year, and in the 10 years before. It is not a tragic, unforeseeable series of unhappy accidents that brought us here. It is choices which this Government has made.”
Mr Johnson said: “I think this is a short-term problem caused by the energy problems, the spikes in gas prices, and like many of the other supply issues we are seeing, including food, are caused by the world economy waking up after a long time in this suspended animation caused by Covid.”
Energy bills for around 15 million households will soar by at least 12% next month. Others face even bigger spikes on the back of a surge in wholesale costs. Higher costs of raw materials and shipping along with the lorry driver shortage are pushing up prices for an array of products and services.
Barcroft Media via Getty Images)
Food prices, which had been falling, are now on the rise.
And the cost of everything from building materials to secondhand cars have been driven up by shortages of one kind or another.
A National Insurance contributions rise of 1.25 percentage points next April to raise billions for health and social care will pile further pressure on households. It will cost £180 a year for those on £24,100, £255 for others earning £30,000 and £715 for a £67,100 wage.
The income tax personal allowance will be frozen until 2026.
Millions of older people missed out after the PM went back on another manifesto pledge by suspending the “triple lock” pledge that would have linked state pensions to earnings.
The Bank of England meets tomorrow on whether to raise interest rates. A rise would push up borrowing costs in a big blow to millions.
Here’s what the rising cost of living could mean for you
Borrowers have benefited from low interest rates. And despite rising inflation, most experts don’t expect those rates to go up any time soon.
One of the Bank of England’s jobs is to keep inflation at around 2%.
One way is to raise its base rate, which is used to influence wider borrowing costs.
Economists think it will keep the rate at its record low 0.1%.
Paul Dales, of Capital Economics, said: “We suspect the Bank will hold off raising rates until 2023.”
For those on the state pension, next April’s increase will be based on what inflation turns out to be this month.
It would have been much higher if the Tories had stuck to their triple lock manifesto pledge, as it would have risen in line with average pay.
Most retirees with a private sector defined benefit pension will not be affected as the annual rise is capped at 5%.
Also worse off are those with a defined contribution pension as, to keep pace with higher living costs, they will have to take out more.
Prices in shops
Households have enjoyed a lengthy spell of deflation, with prices falling year-on-year.
But that is changing, with shop price deflation easing from 1.2% to 0.8% in August.
There are signs food prices are rising year-on-year. And some non-food items, such as electrical products, have risen in price due to shortages and shipping costs. Those prices may rise even further.
British Retail Consortium chief Helen Dickinson said: “Retailers may be forced to pass on some costs to their customers.”
Higher inflation is bad news for the nation’s finances. Among the biggest factors is a knock-on impact for Government borrowing costs.
Yesterday, figures from the Office for National Statistics showed how the tick-up in inflation added a hefty £2.9billion in interest payments last month.
When the nation’s debt mountain stands at an eye-watering £2.2trillion, any increase in borrowing costs caused by higher inflation in the months ahead is a headache that the Chancellor Rishi Sunak could well do without.
Savers have long been the forgotten victims of rock-bottom interest rates.
Although savings rates are on the up, it is still virtually impossible to find rates that beat, or match, inflation.
Research by Hargreaves Lansdown shows the most common reason for people not switching savings accounts is that they think rates are too low to bother with.
If inflation keeps rising, but interest rates do not, savers will pay more for living costs but earn no more from their cash.
Office for National Statistics figures show wages rose 8.8% in the three months to June, compared to the same time a year earlier.
That was mainly because many workers last year were on furlough or reduced hours.
But XpertHR found average pay rises in the three months to August of 2%.
The CBI and Pertemps Network found 24% of firms expect to raise pay above inflation, and 44% to lift it in line with cost-of-living rises.
Employees will use inflation and worker shortages to demand bigger pay rises.
Money worries are a “ticking timebomb” across offices, factories and other workplaces, experts warn.
Four in 10 employers say finance- related stress is negatively affecting productivity and motivation.
More than half of workers now turn to their employer for support with problems such as debt, a Scottish Widows poll found. Six in 10 HR leaders said staff members are increasingly willing to discuss mental health worries with a manager.
Scottish Widows pensions expert Graeme Bold called on bosses to draw up “financial wellbeing” policies.