(Bloomberg Opinion) -- We talk about the U.K.'s cost of living crisis as if it's a new thing. To some extent, this is understandable. The U.K. Consumer Price Index rose by 5.4% in 2021, the fastest pace since March 1992. The older, broader Retail Price Index (RPI), meanwhile, hit 7.5% in December — easily the fastest pace this century.
However, for most Brits, real wages were falling long before inflation accelerated beyond the Bank of England's 2% target. Once they have been adjusted for RPI, median wages are lower today than they were at the time of the 2008 global financial crisis. And lower earners have been suffering for far longer. At the 25th percentile, wages have failed to match RPI every year bar one since 1987.
That said, things aren't so bad that they can't get worse. They're about to for Britain's most vulnerable families.
Universal credit, a benefit for those on low incomes, was temporarily increased by 20 pounds ($27) a week during the pandemic. That increase was reversed last October. According to the Resolution Foundation, an independent economic think tank, that represented an overnight cut of 5% in the income of 6 million poorer households. The decrease came just as it became clear that inflation was anything but transitory.
April's planned increase in National Insurance (NI) is an especially cruel blow. NI is a payroll tax that, over time, builds an entitlement to the U.K. state pension. The move to raise it was part of the government's plan to lower the costs for homeowners needing care in their old age. The issue is that poorer workers pay a higher marginal NI rate than higher earners, so it is a peculiarly nasty and regressive means of extracting more tax revenue.
The tax rate on earnings between 9,568 pounds and 50,270 pounds is set to increase from 12% to 13.25%. However, for earnings above the higher threshold, the marginal rate drops to 3.25%. That means that someone earning 50,270 pounds pays almost 5,400 pounds of NI, or 10.7% of their salary. Someone earning 100,000 though pays barely 7%. (NI is paid by employers too, and their bill for someone earning the aforementioned 50,270 pounds would increase by over 9%.)
The locally administered council tax, a household tax, will increase even more sharply in 2022. The U.K.'s Institute for Fiscal Studies has estimated that once a number of other changes to local government funding are factored in, council taxes could easily rise by as much as 5%. That'll be another hit to the worst off.
Fixed-rate mortgages will shelter many households from the immediate effects of the BOE's interest-rate increases. However, the impact of a quintupling of the Bank's base rate from 0.1% to 0.5% will feed through quickly enough as 1.5 million fixed-rate deals expire this year with a similar number ending in 2023, according to U.K. Finance. This will inevitably increase costs for most of those exiting fixed-rate deals. And of course the base rate is expected to rise further still given the current level of inflation.
Speaking of inflation, volatile food and energy costs tend to be ignored by economists, which is why it took central banks so long to recognize that the current surge in prices wasn't transitory. Yet food and energy costs are the ones that impact people the most because they are largely non-discretionary purchases. Energy costs in particular are also apt to spill over into more generalized inflation.
National Energy Action, a British energy charity, estimates that around 4 million households are already in fuel poverty, defined as being unable to afford to live in a warm, dry home. The charity estimates that the number will rise to 6 million when regulatory price caps on fuel bills rise in April. This will cause average energy bills to increase by well over 50% to 1,971 pounds per year, according to regulator estimates.
Poorer households tend to have their energy usage governed by prepaid meters. For them the average cost will rise to 2,017 pounds per year. A further increase in energy price caps in the autumn could push average bills as high as 2,300 pounds as wholesale gas prices feed through to the consumer market.
With such a pipeline of price increases already baked in, there is no end in sight to the country's cost-of-living crisis, even if energy prices were to stabilize from here. At the same time, the real and more pervasive issue, that of falling real wages, remains deeply embedded and will only be exacerbated by raising both taxes and interest rates. Average wage growth briefly spiked to more than 7% last June, but has almost halved since then to 3.8%, well below all forms of reported inflation.
Economic growth is the only answer to this particular conundrum, and austerity will only make things worse.
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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Stuart Trow is a credit strategist, pensions blogger, radio show host and member of numerous retirement, finance and audit committees.
©2022 Bloomberg L.P.
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