WHILE 2023 MAY OFFER economic policy makers some relief, with signs that inflation will ease and interest rates peak lower than feared, family finances face a ‘groundhog year’ repeat of 2022’s squeeze as the cost-of-living crisis deepens next year, according to the Resolution Foundation’s New Year Outlook.
The Foundation says that 2022 has been horrendous, with the first double-digit inflation in four decades prompting interest rates to rise, and living standards to tank. Real household disposable income fell by 3.3 per cent, or £800 per household, over the course of the year – the biggest annual fall in a century.
However, there are reasons for economists and policy makers focused on avoiding persistently high inflation to think they may have an easier life in 2023.
Inflation may already have peaked (at 11.1 per cent in October), with its global drivers heading into reverse. Wholesale energy prices have fallen significantly, with 2023 wholesale gas prices currently down 58 per cent on the August highs for winter 2022 contracts.
The outlook for the labour market is more uncertain but the Bank of England will welcome signs it is cooling, reducing the potential for domestically generated inflation.
Vacancies are falling (down by nine per cent over the past six months), while short-term unemployment and redundancies are now rising (redundancies are nearing the 100,000 per three months pre-pandemic norm). Firms are reporting that recruitment difficulties are easing, returning to their lowest level since at least 2021.
But while life may get easier for economic policy makers in 2023, things will get significantly worse for households, who are set for a further squeeze on their living standards. Incomes are forecast to fall by 3.8 per cent, an even bigger fall than in 2022. This comes despite benefits and the National Living Wage being set for welcome rises of 10.1 per cent and 9.7 per cent respectively in April.
Findings from a new Resolution Foundation-commissioned YouGov survey of 10,470 adults show that people are over four times as likely to think that their financial situation has become worse rather than better over the past year, and low-income families are three times as likely as high income families to not feel confident about their financial situation over the coming three months.
Pay is set to continue falling in real terms until the second half of 2023, and is unlikely to even return to its current level until the second half of 2024.
While wholesale energy prices have fallen, household spending on energy bills is set to reach a record high as retail prices rise further and Government support is scaled back. The typical household energy bill is set to rise £900 to £2,450 in 2023, up from £1,550 in 2022, and £1,170 in 2019.
While energy bills support is scaled down, the report notes that tax rises will be scaled up, with a typical middle-income household set to see their personal tax bills rise by around £1,000 from next April. While these tax increases will predominately fall on higher-income households, middle-income households will actually face a bigger income hit than the richest five per cent of households (1.6 and 1.3 per cent of income respectively).
Finally, the Foundation notes that while 2022 will be remembered as the year of two-digit inflation, 2023 will be remembered by many as the year of four-digit mortgage bill increases.
The report says that rapidly rising interest rates in 2022 will feed through into higher mortgage costs in 2023, as around two million households move onto new fixed-rate deals, with an average mortgagor household in that position facing a £3,000 increase in their mortgage costs.
Torsten Bell, Chief Executive of the Resolution Foundation, said: “From a cost-of-living perspective, 2022 was a truly horrendous year – far worse than any year in the pandemic or financial crisis. 2023 should see the back of double-digit inflation, but it looks set to be a groundhog year for many families whose incomes look set to fall by just as much as they did in 2022.
“Many families will be helped by benefits and the National Living Wage rising, both by around 10 per cent next April. But this will be swamped by shrinking pay packets, a record £900 rise in energy bills, tax bills for the typical household rising by £1,000, and millions seeing four digit increases in their mortgage bills. For families’ living standards, things will get far worse in 2023 before they start to get better.”
* Read: New Year’s Outlook 2023: They think it’s all over… it isn’t now https://www.resolutionfoundation.org/app/uploads/2022/12/New-Years-Outlook-2023.pdf
* Source: Resolution Foundation – https://www.resolutionfoundation.org