Key facts
- Real living standards in the UK may not recover until the late 2020s.
- The UK is experiencing the biggest real drop in living standards on record.
- Household disposable income is projected to fall by 5.7% between 2022 and 2024.
- Leaving the EU is forecast to cause a 4% long-term hit to UK productivity.
- Inflation is expected to fall to 0.9% in 2024 and remain below 2% for three years.
Real living standards in the UK may not improve until the late 2020s, as the economy grapples with the ongoing cost of living crisis, according to Richard Hughes, chair of the Office for Budget Responsibility (OBR).
Hughes told the BBC that the country is facing the "biggest real drop in living standards on record" and that it could take up to five years for people to feel financially better off. He indicated that even after five years, people's real spending power might not return to pre-pandemic levels.
Several factors are contributing to the UK's economic challenges, including a loss of approximately 500,000 people from the labor force, stagnant investment since 2016, and a slowdown in productivity growth since the 2008 financial crisis. As a net importer of food and energy, the UK is particularly vulnerable to global economic headwinds, with the prices of imported goods rising at twice the pace of domestically produced goods.
The OBR's latest report following the Budget forecasts that household disposable income will fall by 5.7% over the two years between 2022 and 2024. While this is an improvement from earlier forecasts of a 7.1% fall, it would still represent the largest two-year decline since records began in 1956-57.
Inflation, measured by the consumer prices index (CPI), is expected to decrease from 9.1% in 2022 to 6.1% this year, and further to 0.9% in 2024, remaining below the 2% target for the subsequent three years. The OBR also reiterated its forecast that leaving the EU will result in a 4% long-term reduction in UK productivity, a view unchanged seven years after the Brexit vote.
Hughes acknowledged the difficulty in forecasting economic changes, particularly in the current volatile environment characterized by fluctuating energy prices. He noted that all forecasts are subject to error, similar to weather predictions. However, he also pointed to factors that could help bring down inflation, largely driven by high food and energy prices, over the remainder of the year.