Rishi Sunak is at risk of missing his flagship target to halve inflation this year, one of Britain’s leading economic forecasters has warned, as households are left thousands of pounds worse off amid the cost of living crisis.
Sounding the alarm over the hit to living standards, the National Institute of Economic and Social Research said the soaring price of food and other basic essentials meant inflation was on track to remain persistently high for the rest of this year.
It said the combined impact of the Covid pandemic and the ongoing fallout from the cost of living crisis meant Britain’s poorest households would be about £4,000 a year worse off as a result – significantly higher than for richer households.
Sunak pledged to halve inflation in January, when the rate stood at 10.1%, but the latest figures from March showed it was still at 10.1%. NIESR is forecasting a decline, but it warned on Thursday the rate would remain “persistently elevated”, only falling to 5.4% by the end of 2023.
Inflation, which measures the annual increase in the price of an average shopping basket of goods and services for consumers, has been soaring as households and businesses grapple with energy costs after Russia’s invasion of Ukraine.
The prime minister had made halving the UK’s highest rate of price increases in four decades the top item on his list of five key priorities for 2023, as he set out the opening stall of his premiership with a promise to ease the cost of living.
The NIESR estimate is significantly higher than that made by the Office for Budget Responsibility, the government’s independent economic forecaster, which predicted a drop to 2.9%. Inflation in March stood at 10.1%, fuelled by the sharpest annual increase in food prices since 1977.
It comes as the Bank of England prepares to raise interest rates on Thursday for the 12th consecutive time, in the most aggressive campaign to increase borrowing costs since the 1980s.
Jagjit Chadha, the director of NIESR, described Sunak’s decision to set a target to halve inflation as a “complete mistake”, warning that it risked clouding the Bank’s responsibility to steer inflation towards 2%.
“The government should not be stepping into that space. In my own view it has provided a focal point for 5% inflation this year, and contributed to the persistence [of high inflation], by making people plan around that halving,” he said.
“It should not be what the government does.”
Publishing its spring outlook for the economy, the thinktank said personal disposable income was expected to fall by 0.7% in 2023 and by 1.1% next year as households struggle with high inflation and weak levels of pay rises for workers.
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It said the poorest households in Britain were suffering the biggest financial hit, despite emergency government support directed at those on low incomes. Faced with soaring prices for food, energy and other basic essentials, it said the poorest fifth of households would be £4,000 worse off compared with pre-pandemic levels. For the average household the hit would be worth about £3,000.
Adrian Pabst, deputy director for public policy at NIESR, said it was the role of government to support the hardest hit households by combining targeted support on energy bills with a substantial boost to public investment.
“Reversing decline and reducing inequalities will be a generational task. Now is the time to build more productive capacity and grow national assets so that we fulfil the country’s unrealised potential,” he said.
A Treasury spokesperson said the government had introduced one of the most generous cost of living support packages in Europe.
“We are working closely with the Bank of England to bear down on inflation, and remain committed to halving it this year. We must stick firmly to this plan so that everyone’s incomes go further and the right conditions are in place for long-term economic growth,” they added.
