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Evening Standard
Evening Standard
World
David Bond

Cost of living crisis: Poorer households face even higher inflation, Institute for Fiscal Studies warns

According to economists at the IFS increases in gas and electricity prices disproportionately hit poorer families (Danny Lawson/PA)

(Picture: PA Wire)

Poorer households may face an eye watering inflation rate of 14 per cent, the influential Institute for Fiscal Studies has said, after the boss of energy regulator Ofgem warned bills will soar even higher this autumn.

Ofgem chief executive Jonathan Brearley told MPs on the Business, Energy and Industrial Strategy Committee on Tuesday that the default energy tariff cap could rise to around £2,800 in October. The £800 increase comes on top of an April increase on average unfixed tariffs from £1277 to £1971 - a rise of 54 per cent.

According to economists at the IFS increases in gas and electricity prices disproportionately hit poorer families because they spend a larger share of their household spending on energy bills.

The bottom 10 per cent of households spend on average almost three times as much of their budgets on gas and electricity compared to the richest households, meaning they could be hit with inflation four percentage points higher than the 10 per cent forecast by the Bank of England.

Taking into account the Ofgem forecast for October, the IFS said: “A more than doubling of prices of gas and electricity will further increase the difference in the rate of inflation experienced by richer and poorer households.

“Assuming an average rate of inflation of 10 per cent, as currently projected by the Bank of England, the analysis suggests that the poorest households may face average inflation rates of as high as 14 per cent, compared to 8 per cent for the richest households.”

The analysis by the IFS comes as Rishi Sunak is reported to be finalising a new package of support for households, partly funded by a windfall tax on oil and gas companies which have seen profits soar as wholesale gas prices have spiked following the war in Ukraine.

Amid the speculation that an announcement could come as early as Thursday - before Parliament rises for the Whitsun recess - Environment Secretary George Eustice told LBC: “We may hear more this week.”

Earlier speaking on Sky News, Mr Eustice said Mr Sunak had “never ruled out doning anything further. It’s a question of doing the right thing at the right time. He is considering things, when he’s worked out what the right steps will be, we will hear from him.”

Mr Sunak is said to be considering a range of measures including an increase in Universal Credit and other benefits and a cut to VAT with 70-80 per cent targeted at the poorest households.

According to a report in The Times, the Chancellor is preparing a £10bn package which will be partly funded by a windfall tax on energy giants despite opposition from some ministers and Tory MPs who fear it will have a chilling effect on investment in new green energy infrastructure.

Economists at the think-tank the Institute for Government, called on the Chancellor to use targeted support such as increased regular benefit payments or one-off payments such as the warm homes discount, winter fuel payments and cold weather payments.

But the IFG warned the Treasury against deploying broadfer tax cuts arguing that much of the support would go to higher income households.

The IFG report says: “In the case of some tax cuts – such as an income tax or National Insurance cut – little or no support would go to the lowest income households, since they already are not liable to pay these taxes.”

Gemma Tetlow, IfG chief economist and the author of the report, said: “The government is under pressure to help households with the cost of living crisis but it will not be able to help everyone.

“The Bank of England has to dampen growth to bring inflation back under control and the government cannot negate that. But it does have an important decision to make about how to share the pain. Ultimately this is a political decision. But, given that the crisis has so far hit lower income households more than higher income ones, there is a case for the government to offer targeted help to rebalance the pain.”

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