Living standards are still on course to fall by the largest amount since records began in the 50s, despite an improvement in inflation forecasts, the fiscal watchdog has said.
The Office for Budget Responsibility (OBR) said that despite inflation falling from double digits to 2.9 per cent in December, prices have outstripped wage growth to such an extent that disposable income will still suffer the biggest two-year drop ever recorded.
The forecast comes as the Government continues to grapple with continuing strikes across many sectors, with half a million junior doctors, teachers, civil servants, lecturers, London Underground drivers, BBC journalists and Amazon workers walking out on Budget day to demand that pay keeps up with inflation.
Household disposable income – the amount available to spend after basic living costs – will fall by 5.7 per cent over two years between 2022 and 2024.
While the situation has improved since forecasts in the autumn, when living standards were expected to fall by 7.1 per cent – “it would still be the largest two-year fall since records began in 1956-57”, the OBR said.
The hit to living standards is largely driven by soaring energy costs, which are at least partly driven by the Ukraine war, and the rising cost of goods which the UK imports more than it exports.
While the outlook has improved since autumn, overall living standards will still remain 0.4 per cent lower than pre-Covid levels in 2028, the watchdog said in its economic and fiscal outlook accompanying Chancellor Jeremy Hunt’s Budget.
It comes despite the OBR predicting a sharper drop in inflation than in autumn, and than the Bank of England.
Annually, inflation as measured by the consumer prices index (CPI) will fall from 9.1 per cent in 2022 to 6.1 per cent this year, before dropping to 0.9 per cent in 2024 and remaining well below the 2 per cent target for the next three years, according to the OBR forecasts.
Mr Hunt said this showed that the UK economy is “on the right track” and that Prime Minister Rishi Sunak’s priority to halve inflation by the end of the year would be met easily.”
Shadow Chancellor Rachel Reeves seized on the living standards figures to show that Mr Hunt’s Budget was “just papering over the cracks”.
Elsewhere, the OBR said it had seen nothing, seven years after the Brexit vote, to change its forecast that leaving the EU will cause a 4 per cent long-term hit to the UK’s productivity.
The Brexit deal on Northern Ireland struck by Mr Sunak could however “mitigate” against the worst assumptions of the forecast by helping UK-EU trade function better overall under the terms of the trade agreement signed by Boris Johnson, the OBR said.