Britain faces cost-of-living ‘catastrophe’ in 2022

British households are facing “the year of the squeeze” in 2022 as soaring energy bills, rising taxes and high inflation eat into incomes, according to a think tank.

Real wages will effectively stagnate next year, rising just 0.1 per cent, with families set to be £1,200-a-year worse off from April when a price cap on energy bills is raised and a tax increase comes into effect, according to the London-based Resolution Foundation.

This leaves millions of families facing a “cost-of-living catastrophe” next year, the think tank warned. “2022 will begin with Omicron at the forefront of everyone’s minds,” said Torsten Bell, Resolution’s chief executive. “But while the economic impact of this new wave is uncertain, it should at least be short-lived. Instead, 2022 will be the ‘year of the squeeze’.”

UK inflation has already risen past the 5 per cent mark, hitting 5.1 per cent in November – the highest level since September 2011 – with expectations of 6 per cent next year – the highest rate in three decades.

This will hit consumers who are already grappling with the fallout from the coronavirus pandemic as well as higher fuel bills at the petrol pump and a shortage of goods at supermarkets amid the supply chain crisis.

Households have also faced rising energy bills, as wholesale gas prices soared in recent months, hitting a new record last week of £4.50 per therm.

In April, the higher energy bills price cap is set to be increased, which the Resolution Foundation said will add an additional £500 to spending.

Failing energy firms could then see a further £100 added to energy bills, while a 1.25 per cent rise in National Insurance contributions will cost the average household £600 a year, taking the total hit to incomes to £1,200.

The energy price rise will disproportionately affect low-income families who spend more of their income on energy, accounting for 12 per cent of the income of the poorest households compared with 8.5 per cent now.

Meanwhile, higher earning families will be hit harder by April's National Insurance rise, which would lift tax bills by an average of £750 a year.

By the end of 2024, real wages would still be £740 a year lower than if the UK's "already sluggish" pre-pandemic pay growth continued.

"The overall picture is likely to be one of prices surging and pay packets stagnating," Mr Bell said.

"In fact, real wages have already started falling, and are set to go into next Christmas barely higher than they are now. The peak of the squeeze will be in April, as families face a £1,200 income hit from soaring energy bills and tax rises."

To offset this cost-of-living crisis, the Foundation said the government must act to reduce energy costs with options to reduce the increase in the energy cap including compensating suppliers for the difference, and extending the time period to recoup the cost of the company collapses this year.

“On current trends, this time next year we’re likely to look back on a 2022 defined more by a cost of living crunch than the Omicron wave that will dominate its start,” the Resolution Foundation said.