Britain’s poorest households are expected to see their living costs increase by almost twice the rate as the richest in society do when energy bills rise this autumn, leading economists have warned.
The Institute for Fiscal Studies (IFS) said the fresh surge in gas and electricity bills expected in October could lead to average annual inflation rates of as high as 14% for the poorest tenth of households.
The increase in the energy price cap to close to £2,800 is likely to hit poorer families disproportionately because a larger share of their total spending goes on energy. The IFS said the poorest tenth of households typically spend almost three times as much of their budgets on gas and electricity compared with the richest 10th.
In a stark contrast to a 14% personal inflation rate for the poorest, the richest tenth could see rates of about 8%, the thinktank said. Across all households inflation is likely to reach 10% amid the surge in energy bills, the highest rate since 1982.
Calls for the government to take urgent action on the cost of living have crescendoed this week after the head of Ofgem, the energy regulator, told MPs it was on course to raise the cap on consumer gas and electricity bills to about £2,800 in October.
The increase in the price cap would push up the average annual bill by more than £800, after Ofgem increased it by £693 in April to £1,971. It is thought the chancellor, Rishi Sunak, is drawing up an energy support package that could be announced as soon as Thursday.
“As poorer households spend more of their budgets on gas and electricity, this increase is likely to hit poorer households harder,” said Heidi Karjalainen, a research economist at the IFS.
In a sign of the growing pressure on households, figures on Wednesday showed average petrol prices hit a new record high of 170.4p per litre, up from 129p a litre a year ago. Diesel rose to 181.4p, up from 131.3p a year earlier.
The Resolution Foundation said one-off payments targeted at poorer households worth up to £15bn were needed to stop rising energy bills putting millions of families into destitution this winter.
While all households are expected to feel the squeeze from rising living costs this year, the thinktank warned that poorer families were being hit hardest as they spend a greater share of their budgets on energy bills and food – the biggest drivers of the inflation shock sweeping Britain.
It said the scale of the crisis meant the number of households in severe fuel stress – whereby families find themselves spending £1 of every £5 of their budget on energy bills – could surge from 325,000 households in England last winter to 1.9 million this year, unless significant targeted support is provided.
Karl Handscomb, a senior economist at the Resolution Foundation, said Sunak should ignore calls to provide support via cutting income tax and VAT, and instead focus on increasing the value of benefits. “That would be the best way to help millions of families through what will be a very tough winter.,” he said.
“The scale and depth of the cost of living crisis requires unprecedented, targeted support of up to £15bn. Delivering that support is far from straightforward, but it can be done.”