Working families are facing an annual deficit of £2,900 due to the cost of living squeeze over the past five years, according to an analysis by the Resolution Foundation think tank. The study compares current household financial standing to a scenario where inflation remained at a more typical rate of approximately 2% per year.
The report highlights how households have adjusted to soaring prices, with some individuals reducing heating use and others struggling to keep up with bill payments. This economic pressure comes amid continued challenges from elevated fuel and energy costs, compounded by rising mortgage rates.
Economic Shocks and Their Impact
The Resolution Foundation's findings indicate that a series of significant economic shocks over the last five years have effectively compressed 13 years of normal inflation into this period. By the summer of 2026, prices had risen by nearly 30% compared to 2021 levels. The analysis identifies three primary contributors to this sustained cost increase.
The initial shock stemmed from the aftermath of the COVID-19 pandemic, which disrupted global supply chains as economies reopened. This was followed by Russia's full-scale invasion of Ukraine in 2022, which propelled inflation rates to as high as 11%. Most recently, geopolitical tensions, including actions attributed to Donald Trump's administration regarding Iran, have led to disruptions in energy supplies from the Middle East, consequently driving up oil and gas prices.
Energy costs are identified as being at the "epicenter" of these shocks, also contributing significantly to sharp increases in food prices. The report emphasizes that the poorest households have been disproportionately affected, as inflation has been steeper for essential goods and services that constitute a larger portion of their spending.
Government Support and Future Outlook
With public finances increasingly strained, the Resolution Foundation warns that the government's capacity to offer widespread financial assistance, as seen in previous crises, is diminished. This suggests that middle-income households may need to manage economic hardships with less direct support.
James Smith, chief economist at the Resolution Foundation, stated that while aid is necessary, the current fiscal climate offers less room for such interventions. He noted that "The Government can't borrow its way out of this, and repeating the expensive blanket support of 2022 isn't an option." Smith recommended that any future assistance must be precisely targeted towards lower-income families experiencing the most severe hardship, particularly concerning their energy bills.