Working Families Face Significant Financial Strain Due to Cost of Living Squeeze

Working families are facing an annual deficit of £2,900 due to the cost of living squeeze over the past five years, according to analysis by the Resolution Foundation think-tank. The study compares household financial standing against a scenario where inflation remained at a more typical rate of around 2% annually.

Households have adapted to rising prices by reducing energy consumption and falling behind on bills. This financial pressure comes amid escalating fuel and energy costs, compounded by increased mortgage rates. This week, average five-year mortgage deals surpassed 6% for the first time in three years, and energy bills are projected to rise by another 16% in January, reaching their highest level in three years.

The Resolution Foundation report identifies three primary shocks contributing to the sustained inflation. The initial shock stemmed from supply chain disruptions following the COVID-19 pandemic as the global economy reopened. This was exacerbated by Russia's full-scale invasion of Ukraine in 2022, which propelled inflation to 11%. More recently, geopolitical tensions in the Middle East have disrupted energy supplies, driving up oil and gas prices.

Energy costs have been central to these economic shocks, also contributing to significant increases in food prices. The report indicates that the poorest households have been disproportionately affected, as essential items, which constitute a larger portion of their spending, have experienced steeper price hikes.

With public finances facing increasing strain, the think-tank warns that the government's capacity to offer widespread financial assistance, as seen in past crises, may be limited. This suggests that middle-income households might need to manage these economic challenges with less external support. James Smith, chief economist at the Resolution Foundation, stated that while help is needed, the current fiscal situation restricts the government's ability to provide it. He emphasized that borrowing to address the crisis is not a viable long-term solution and that blanket support measures, similar to those in 2022, are not feasible. Smith advocated for targeted assistance for low-income families facing the most severe hardship, particularly concerning energy bills.