Conflict in the Middle East could trigger an energy price shock that wipes out expected growth in living standards in the UK, valued at £300 for a typical working-age household over the next year, a leading think tank has warned.
The Resolution Foundation said a “decent” one-time increase in the average standard of living this year and an extraordinary increase for low-income households could be reversed by rising oil and gas prices as the conflict with Iran disrupts supplies.
The UK’s dependence on Middle Eastern gas makes it especially vulnerable to an effective blockade of the Strait of Hormuz, through which around 20% of the world’s liquefied natural gas is transported.
According to the think tank’s calculations in its analysis of the spring forecast on Tuesday, living standards for the typical working-age household are on track to grow by £300 over the next year, or 0.9%.
Research director James Smith said the government should consider developing a social tariff to protect low-income families from any energy shock because a blanket support package had proven too costly in the past.
“We have asked the government to develop the infrastructure for a social tariff, aimed at people with high energy needs and low income levels. Liz Truss showed us that if you try to support people across the board, that is very expensive.”
He added: “There is pressure from the right and the left on the government saying why we are worrying (about debt levels) and tightening our belts. This is exactly why. Because if the government says it can’t do things like energy support, you know it has a big problem.”
Lower-income households are expected to see a larger rise in living standards of £800, an increase of 3.9%, mainly due to the removal of the two-child benefit cap and an above-inflation increase in universal credit. This would be the second year with better living standards in the last two decades for the poorest households.
However, if the recent rise in energy prices persists, the foundation said all gains could disappear.
While the effect might not be as large as the rise caused by the Russian invasion of Ukraine, which sent food, oil and gas prices soaring, a rise this year in oil and gas prices could add a percentage point to UK inflation and £500 to typical annual energy bills, he said.
Ruth Curtice, chief executive of the Resolution Foundation, said: “The immediate economic outlook for Britain is very uncertain, with yesterday’s forecasts already looking out of date, while the living standards picture for the rest of parliament is very unbalanced.
“Next year will be decent for living standards and great for poorer families, as wages and benefits rise above the level of inflation. But a new shock to energy prices risks ruining this good news.”
The Joseph Rowntree Foundation said the situation could be even worse, arguing that the government’s planned increases in average living standards ignored housing cost pressures.
“Our modeling finds that average annual household disposable income is projected to grow by just £40 over the course of the current parliament (April 2024 to April 2029) after adjusting for inflation,” he said.
The charity said forecasts from the Office for Budget Responsibility, the Treasury’s independent forecaster, on key economic indicators, such as the consumer price index measure of inflation and average weekly income, were fed into the Institute for Public Policy Research’s tax benefits model, which uses the Household Resources Survey to project household incomes for each year until the end of parliament.
The IPPR, a left-leaning think tank, uses the Office for National Statistics’ Family Resources Survey to get a more accurate picture of living standards, especially for those in the bottom half of the income scale.
