UK households face biggest blow to incomes in three decades as inflation and energy prices soar

Householders across the country are facing the biggest blow to their income in more than three decades after being hit with the double whammy of a rise in inflation and soaring energy prices as a National Insurance tax hike also looms.

The cost-of-living crisis was laid bare on Thursday as the Bank of England forecast inflation would hit 7.25 per cent in April.

The inflation rate would see disposable incomes slashed by around 2 per cent – the worst impact since records began in 1990.

The blow comes as Chancellor Rishi Sunak was forced to step in to offset a nearly £700 spike in energy bills that, even with support, the Resolution Foundation think-tank warns will push four million households into fuel poverty.

The Bank of England, raised interest rates again on Thursday

Hitting 22 million households from the beginning of April, the devastating rise comes as oil giant Shell revealed a 14-fold increase in profits.

Ofgem was forced to hike the energy price cap to a record £1,971 for a typical household on a standard tariff as gas prices soared to unprecedented highs.

Responding to concerns, Bank of England rate setters hiked the base interest rate from 0.25 per cent to 0.5 per cent – a move it hopes will take some pressure off households.

At a press conference following the rates decision, Bank governor Andrew Bailey said the Chancellor’s support measures outlined on Thursday would help take some of the pressure off households.

He warned: “If we don’t take this action, it would be even worse. I know it’s a hard message.”

Speaking in the Commons, Mr Sunak promised to help households with a £200 rebate on energy bills, and a £150 reduction in council tax for millions in England.

The UK Government has estimated Scotland will receive an extra £290 million of Barnett funding as a result of this, with Nicola Sturgeon pledged to pass on "every single penny" of extra money.

Mr Sunak told MPs: “The price cap has meant that the impact of soaring gas prices has so far fallen predominantly on energy companies, so much so that some suppliers who couldn’t afford to meet those extra costs have gone out of business as a result.

“It is not sustainable to keep holding the price of energy artificially low.

“For me to stand here and pretend we don’t have to adjust to paying higher prices would be wrong and dishonest.

“But what we can do is take the sting out of a significant price shock for millions of families by making sure that the increase in prices is smaller initially and spread over a longer period.”

The price cap increase includes a £68 charge per household to cover the costs of protecting millions of customers whose energy suppliers collapsed in recent months.

Ofgem had developed a way of spreading this charge over a longer period, but scrapped the plan when it learnt of the Government’s action.

“It didn’t make value-for-money sense to be running a private financing scheme over and above that,” Ofgem chief executive Jonathan Brearley said.

For customers with prepayment meters, the price cap will go up by £708 to £2,017, the regulator added.

The price cap is set per unit of energy used with the increase calculated based on a household that uses a “typical” amount of energy. Households that use more will pay more.

The announcement prompted a furious response from opposition parties, who demanded the UK Government go further.

Labour’s Nick Smith said: “Does he [the Chancellor] really think that the super profits of $20 billion made by Shell are untouchable? His hands-off approach won’t persuade many people across our country.”

Shadow chancellor Rachel Reeves said millions of people were cutting back spending to pay bills, adding: “What do the Government offer? A buy-now, pay-later scheme that loads up costs for tomorrow.

“The best way of targeting support to those who need it most would be an increase to £400 and an extension to nine million households of the warm homes discount, as Labour has proposed today.

"Their scheme today is a pale imitation of Labour’s, especially for the households and pensioners on the most modest incomes.”

SNP shadow energy spokesperson Alan Brown labelled the price hike a “devastating hammer blow” and called for an immediate emergency financial package.

He said: "The toxic combination of Tory cuts, regressive tax hikes and the soaring cost of energy bills and Brexit will leave the majority of families hundreds or thousands of pounds worse off even after the limited mitigation from the UK Government, with estimates suggesting the rise could push a further 211,000 households into fuel poverty and around 235,000 households who were already fuel poor into extreme fuel poverty.

"The UK Government must step up to tackle the growing cost-of-living crisis under its watch by urgently delivering an emergency financial package to support families, including introducing an energy payment for low income households and a UK-wide child payment of £20 per child per week."

Naomi Smith, chief executive of better democracy campaign group Best for Britain, claimed the energy bill crisis was on the UK Government.

She said: "The ruling party has been in Number 10 since 2010, presiding over 12 years of economic underperformance.

"More recently, pandemic mismanagement, a poorly negotiated Brexit deal and billions in wasteful spending has further crippled UK economic growth, so we are now in the worst possible position to deal with the cost-of-living crisis.

"Until this spent government is replaced by one with economic competence, we will all continue to foot the bill for their failure."

Consumer groups also raised concerns about the energy prices, warning a lack of support would see people die.

Frazer Scott, chief executive of Energy Action Scotland, said the announcement was “absolutely devastating” for Scots.

He said: “It impacts more on those households in the lowest incomes who spend a significantly higher proportion of their incomes to heat and power their homes.

"Households with all electric heating are already at the greatest risk of being in fuel poverty. And they have been for some considerable time.

"There are important short and long-term priorities. We are absolutely in a crisis. There needs to be a crisis response. Advice, support, financial and non-financial to minimise the impact of the current price increases.

“If we don’t, lives will be lost as people are simply unable to heat their homes.”

Citizens Advice Scotland chief executive Derek Mitchell claimed the increased bills were a “hammer blow”.

He said: “One in three of us already find bills unaffordable and shamefully almost half a million people in Scotland have had to cut back on food to deal with unaffordable bills.

“This simply isn’t a sustainable position for people. April will be a nightmare scenario as rising bills and prices in the shops collide with flat or falling incomes, creating a perfect storm that could sweep millions of people across the UK into poverty, debt and destitution.

"No-one should be forced into the heart breaking choice between keeping their homes warm or feeding their families.

“We need immediate direct interventions.”

The Federation of Small Businesses (FSB) in Scotland warned smaller firms were under sustained pressure and Thursday’s announcements provided no relief.

Andrew McRae, the FSB in Scotland’s policy chair, said: “The measures outlined by the Chancellor today do nothing to protect local and independent businesses from punishing increases to their energy bills.

“Small businesses aren’t included in the price cap and don’t have the negotiating power of the biggest firms. That means that Scottish businesses are under the same pressure as households with none of the protections.

“Over the last two years, we know that thousands of Scottish businesses exhausted their cash reserves and took on debt to survive. Now all of this debt that carries a floating rate is going to become more expensive to service.”