Households face worst squeeze ever as Sunak admits middle income families face cost-of-living crisis

Millions worse off as energy price hikes and inflation trigger ‘Black Thursday’ for living costs

British households face the worst squeeze on record, as chancellor Rishi Sunak warned that even middle earners will “feel the pinch” in the months ahead.

Mr Sunak hit back at criticism from economists that the support measures announced by the government on Thursday failed to target enough funding at the UK’s poorest households.

“The price rise is so significant that it’s not just those families who are on benefits that are going to feel the pinch, it’s actually middle income families as well. Families that are working hard, they’re not on welfare; this will be a significant increase for them,” Mr Sunak told reporters.

On Thursday, regulator Ofgem revealed that the energy price cap will rise by nearly £700 for the average household from April to £1,971.

Mr Sunak then announced that 80 per cent of households – those in council tax bands A-D – will receive a tax rebate of £150 this spring to try to mitigate the shock to household budgets.

This will then be followed by a £200 discount on energy bills in October, which will be repaid in £40 instalments over five years from 2023.

“For [the] poorest, it would have been better just to raise benefits in line with inflation,” said Paul Johnson, director of the Institute for Fiscal Studies. Its calculations showed that a worker on £30,000 a year would be roughly £400 worse off in real terms in the next financial year, compared with last.

Another think tank, the Resolution Foundation, said the that the package didn’t “offer enough to many low-income families who find themselves at the heart of the cost of living crisis”. As a result, the number of households under “fuel stress” – those forced to spend at least 10 per cent of their income on energy costs – would double to 5 million, the think tank said.

Mr Sunak spoke to reporters after the Bank of England raised its key interest rate by 0.25 percentage points to 0.5 per cent on Thursday, as it revealed that it believed price growth would hit more than 7 per cent in April.

This peak would mark the highest rate of consumer price inflation in the UK since the early 1990s. GDP growth would also be “subdued” in the years ahead, the central bank said, as it slashed its expectations for output this year by 1.25 percentage points.

As wages fail to keep up with the increase in the cost of living, and taxes rise, households will see their disposable income shrink by 2 per cent this year. That would mark the worse hit to spending power in more than three decades, since records began. The squeeze will also continue into 2023, with a further 0.5 per cent hit to households’ cash after accounting for tax and price rises.

The central bank’s governor, Andrew Bailey, was asked if households faced a “Black Thursday” for living costs.

Mr Bailey told reporters he and his fellow policymakers had raised rates because they fear that inflationary forces could become “ingrained” in the UK economy. This could take hold if workers continue to ask for pay rises in order to cope with higher prices arising from more costly energy imports.

Mr Sunak said that the cost-of-living crunch, exacerbated by energy costs, could continue in the months and years ahead. “There’s global forces at play here that drive up gas prices at the moment and I don’t have a crystal ball,” he said.

However, the chancellor added that he would not reconsider raising national insurance contributions by about 10 per cent for most households in the spring.

MPs across the political spectrum took to social media to emphasise their concerns about the pressures on household incomes.

Trade minister Penny Mordaunt said in response to Mr Sunak’s measures: “These high costs will be with us for a while so I am pushing for a long-term plan to deal with these issues.”