Cumulative policy responses to the exceptional sequence of shocks, which have buffeted the economy since June 2016, are set to lower the real incomes of households in the UK, according to the latest quarterly outlook of the UK economy by the National Institute of Economic and Social Research (NIESR).

The forecast highlights that rising prices and higher taxes are squeezing household budgets, with the combined effect of inflation and the measures announced in March's Spring Statement hitting the poorest households hardest. The NIESR calculate a real income decline of 2.4 per cent in 2022, accompanied by a small rise in unemployment in 2023 to 5.1 per cent. For 2022-23 it is estimated that 1.5 million households across the UK will face food and energy bills greater than their disposable income, with the highest incidence in London and Scotland.

They suggest that the Chancellor should use some of the reported £20 billion fiscal windfall to provide emergency support that cushions this income shock, The forecast shows that a Universal Credit uplift of £25 per week between May and October 2022 would benefit about five million households and cost around £1.35 billion. In addition, they recommend that £2.85 billion should be given to the 11.3 million lower-income households, amounting to a one-off cash payment worth £250 per household for 2022-23.

Without this targeted support, a further increase in extreme poverty is expected: in 2022-23, about 250,000 more households will slide into destitution, taking the total number to around one million, whilst approximately another 500,000 households face the choice between eating and heating.

The NIESR have also forecast that CPI inflation will average 7.8 per cent in 2022 and peak at 8.3 per cent in the fourth quarter, remaining above 3 per cent until 2024, while RPI inflation will reach 14.4 per cent – its highest level since 1980.

The forecast for GDP growth is to increase by 3.5 per cent in 2022 – declining in the third and fourth quarters – then by 0.8 per cent in 2023 and 0.9 per cent in 2024. The medium-term outlook for GDP growth is slow even by the standards of recent history, returning to 1.5 per cent only in 2026.

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The fiscal policy stance has made the job of the Monetary Policy Committee (MPC) harder. The NIESR expect further rises in the Bank of England's base interest rate to take place throughout 2022, with the rate reaching 2 per cent in the final quarter of the year and settling at around 2.5 per cent for the majority of the forecast period. Fundamentally, the MPC will have to navigate carefully the treacherous waters caused by the tension between, on the one hand, allowing inflation expectations to de-anchor and, on the other hand, plunging the economy into a deep recession.

Professor Stephen Millard, NIESR's Deputy Director for Macroeconomics, said:

"Although the war in Ukraine is fundamentally a human tragedy, it has resulted in another supply shock for the UK economy: pushing down growth and pushing up on inflation.

"We expect GDP to fall in the final two quarters of this year, but do not expect a severe recession. We also expect real incomes to continue to fall as inflation continues to rise. We need fiscal policy to loosen and monetary policy to tighten if the UK economy is going to sail safely through these treacherous seas."

Professor Adrian Pabst, NIESR's Deputy Director for Public Policy, said:

"Prices will push up bills, drag down demand and increase income inequalities. The big squeeze on budgets will hit the lower-income households hardest who live in some of the most economically and socially deprived parts of the country. To stop an additional 250,000 households from sliding into debt and destitution, the Chancellor should instate a £25 per week Universal Credit uplift for at least six months.

"To help the lower-income 11.3m households that struggle to make ends meet, we call for a one-off cash payment of £250 in 2022-23. This emergency support costs about £4.2 billion, which is affordable given the fiscal room for manoeuvre that the OBR in March put at £20 billion."

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