UK on brink of 'stagflation' as households struggle with cost of living, think tank warns

The reportl cals for the government to increase Universal Credit payments for at least six months. Credit: PA

The UK is set to slide into a recession - forcing households struggling with the cost of living to drain their savings, a think tank has warned.

The National Institute of Economic and Social Research (NIESR) is calling on the government to urgently increase Universal Credit payments, to help the most vulnerable.

More than 2.5 million households are set to see their savings obliterated by the rising cost of living, the new forecast by the NIESR warns.

That will mean that one in five UK households will have no savings by 2024, according to its prediction.

The think tank's report warned of a “three-quarter technical recession, but a relatively shallow one" - but added there was an “increased possibility of a deeper recession."

It also said the threat of 'stagflation' has returned for the first time since the 1970s.

Stagflation describes a period where the economy is squeezed by slow growth, high unemployment, and rising prices.

Gross domestic product (GDP) is set to shrink over the second half of 2022, and in the first three months of next year, according to the NIESR.

The UK's economy is likely to grow this year, it said, but only by 3.5%, and then down to 0.5% next year – far from a post-pandemic bounce back.

The institute also said the number of households living pay check to pay check will nearly double from 3.9 million to 6.8 million – or 25% – in 2024.

The report found that inflation will peak around the last three months of this year.

Consumer price index inflation, which soared to 9.4% in June, will reach close to 11%, but will fall back to 3% by the end of 2023, the report forecast.

“The UK economy is heading into a period of stagflation with high inflation and a recession hitting the economy simultaneously,” said Professor Stephen Millard, NIESR deputy director for macroeconomics.

He called on the Bank of England to try to get inflation under control – interest rates of 3% will probably be necessary for that – and for the new chancellor to support households hit by the recession and cost of living squeeze.

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The report called for the government to increase Universal Credit payments by £25 per week for at least six months from October, which would cost around £1.4 billion, and also to increase energy bill relief payments from £400 to £600 for 11 million low-income households, costing £2.2 billion.

The research shows that between the impact of inflation and the refusal of the government to raise benefits in line with inflation, the 10% poorest households will be around 5% worse off, despite the support they have been promised on energy bills.

It makes them the worst hit of any income group in society.

“All households are facing soaring energy and food bills but too many have to resort to credit, build up payment arrears or see their savings wiped out,” said Professor Adrian Pabst, deputy director for public policy at NIESR.

“The incoming administration needs to provide immediate emergency support to the 1.2 million hardest hit households and the one in five households that will become financially vulnerable as the energy price cap is lifted and the recession begins to bite.”

The report also forecast that real incomes will be permanently lower, dropping 2.5% in 2022 alone.

Real incomes will be 7% below where they were headed before Covid by 2026, it said. Around 3% to 5% of this hit will come from Brexit, 1% to 3% from energy price rises and the remainder from government policy.