Most commentators were complacent about the risks of higher inflation in 2021 and seem determined not to be caught out again this year. But some of the rhetoric is now running well ahead of reality.
Take the warnings that UK families are facing an ‘overnight cost of living catastrophe’. It is true that many are likely to suffer a significant hit to their real disposable incomes from April onwards, as a result of higher energy bills and tax rises. The Resolution Foundation has estimated that these will cost an average of £1,200 per household.
Nonetheless, this will not happen ‘overnight’, it is not primarily about the ‘cost of living’ and it is not necessarily a ‘catastrophe’ either.
This is more than mere quibbling over the precise choice of words to describe what might happen. A proper understanding of the problems is key to assessing the risks to the economy and how policy should respond.
“A lot else could also happen over this period, including a renewed decline in energy prices (remember that the cap is a ceiling, not a floor, and will be reviewed during the year)”
Note first that the hit to incomes would be spread over the course of the year, so families would not have to find £1,200 straightaway. A lot else could also happen over this period, including a renewed decline in energy prices (remember that the cap is a ceiling, not a floor, and will be reviewed during the year) and a renewed acceleration in real wages. In the meantime, the jobs market remains strong.
Second, the £1,200 figure is a mix of energy price rises and tax hikes, notably the 1.25% increase in National Insurance Contributions (NICs). It is therefore not just about ‘the cost of living’.
