Benefit claimants are experiencing a reduction in the real value of their payments at a time when rising inflation is hitting low-income households the hardest.

In this Insight, we explain how high inflation reduces the value of benefits in real terms. We also explore the extent to which the Government’s Cost of Living Payments will change households’ monthly incomes.

How high is inflation currently?

Inflation has been rising in the UK since early 2021.

Consumer prices, as measured by the Consumer Prices Index (CPI), were 9.9% higher in August 2022 than a year before. This is slightly lower than the figure for July which, at 10.1%, was the highest inflation has been since 1982.

In August 2022, the Bank of England expected inflation to peak at 13.1% in Q4 2022. This is significantly higher than its May 2022 forecast and reflects the sharp increase in energy prices since then.

“Chart showing rising inflation up to August 2022, as reported by the Office for National Statistics, and quarterly inflation forecasts from the Bank of England from Q4 2022 to Q4 2024. Inflation is expected to remain above 2% (the Bank of England's target rate) until Q3 2024.”
Source: ONS, CPI annual inflation rate, series D7G7 [14 September 2022 update]; BoE, Monetary Policy Report – August 2022 (quarterly forecasts)

The Institute for Fiscal Studies (IFS) found that as the cost of gas and electricity started to rise from April 2022, inflation began hitting low-income households – who spend more of their budgets on energy – harder.

In August the IFS estimated that the lowest income quintile (the poorest 20% of the population) will face an inflation rate of 17.6% in October 2022, as shown in the chart below. This is almost 7 percentage points higher than the inflation rate for the richest quintile.

Inflation chart
Source: Figure 1 from IFS, The long squeeze: rising inflation and the current government support package, 15 August 2022

A real terms cut to benefit rates

Most benefits are usually increased (“uprated”) each April in line with the annual increase in CPI inflation to the preceding September. The Government says this is the latest CPI figure it can use to allow sufficient time to apply uprating through the various systems that deliver benefits.

Under this practice, when inflation is stable, benefits broadly retain their value in real terms over the course of the year. However, when inflation rises for prolonged periods, the time lag between the September measure of inflation and the increase to benefits the following April can result in real terms reductions.

In April 2022 benefits and State Pensions were uprated by 3.1% (the CPI figure for September 2021). This was much lower than inflation at the time of uprating (9%) and forecasts for the remainder of the financial year. As a result, benefit rates for 2022/23 are worth less in real terms that the 2021/22 rates.

If benefits are uprated as usual next April, they will rise by around 10%. This will represent a marked increase compared to last year’s uprating, although the Resolution Foundation does not expect the real value of unemployment benefits to recover to October 2021 levels until April 2024.

How is the Government supporting benefit claimants?

The Johnson Government’s response to high levels of inflation was to introduce a cost of living support package.

The support includes one-off payments to certain means-tested benefit and tax credit claimants of £650, with additional payments available for pensioners (£300) and people receiving certain non-means-tested disability payments (£150). These payments are forecast to cost an estimated £8.8 billion. The package also provides support with energy bills.

Will the additional support keep incomes from falling in real terms?

In a statement to the Commons in May 2022, the then-Chancellor (Rishi Sunak) acknowledged there had been calls to uprate benefits in line with more recent inflation figures.

He countered that uprating in the required time-frame could only have been done for Universal Credit, and that additional Cost of Living Payments to certain means-tested benefit claimants would actually provide more, on average, to these claimants than if benefits had been uprated by 9% (the rate of inflation at the time).

The IFS has said if inflation forecasts had played out as was expected in May, real incomes of low-income households would have been broadly maintained by the additional Government support. However, higher levels of inflation since then mean some households will still experience a squeeze on their incomes.

The table below shows Library estimates of the real terms change in monthly income for three hypothetical households in receipt of benefits. These estimates cover income received directly to households and do not factor in the £400 Energy Bills Support Scheme or the recently announced Energy Price Guarantee.

With an inflation rate of 12.9% (as the Bank of England predicts for the last 6 months of 2022/23), all three households face reductions of at least £120 per month from October 2022 onwards. This is despite the additional Cost of Living Payments.

Estimated real terms(a) monthly income from key benefits and Cost of Living Payments(b)

Notes: a) Real terms estimates are based on assumed CPI inflation of 12.9% for Q3 and Q4 of 2022/23, as per the Bank of England Monetary Policy Report – August 2022.

b) Incomes from key benefits and earnings plus monthly equivalised estimates of £150 council tax refund for 2022/23, £650 Cost of Living Payment for UC households, £300 pensioner Cost of Living Payment.

Claimant  2021/22  2022/23 from Oct 2022 Monthly change from October 2022/23
Single parent with 2 children:

earning £18,000 per year in 2021/22

 £2,277 £2,148 -£129
Couple with 2 children:

earning £36,000 per year in 2021/22

 £2,736 £2,565 -£171
Single State Pension claimant:

additional income of £20,000 per year in 2021/22

£2,167 £2,047 -£120

How does inflation affect the Benefit Cap?

A cap limiting the maximum amount most households can receive in benefits was introduced in 2013. Originally, the Benefit Cap was set at £26,000 a year (£500 a week) for a family and £18,200 a year (£50O a week) for single adults with no children.

In 2016 the Cap was lowered, with different rates applying in London and elsewhere in Great Britain:

  • In London, families were capped at £23,000 a year (£440 a week) and single adults at £15,410 (£300 a week).
  • Outside of London, families were capped at £20,000 a year (£380 a week) and single adults at £13,400 (£260 a week).

The Benefit Cap has remained frozen at these levels since.

Each year the Cap remains fixed in cash terms, it loses value in real terms. Higher levels of inflation accelerate this trend.

Between 2016/17 and 2021/22, the real value of the cap reduced by 11%. Based on current inflation forecasts, by 2023/24 its value will have declined by 26%. The fall in the real value of the cap is shown in the chart below.

Benefit cap chart
Source: Real terms series based on ONS, CPI annual inflation rate, series D7G7 [14 September 2022 update] to August 2022 and BoE, Monetary Policy Report – August 2022 forecasts from September 2022

As of May 2022, around 130,000 households were subject to the Benefit Cap. Of these, 87% were families with children and 69% were single parent families. When benefits are uprated, these households will see no increase in the amount they receive despite the rising cost of living.

If benefit rates are increased by 10% next April, in line with the Bank of England’s CPI forecast for September 2022, we estimate that up to 45,000 extra households may have their benefits capped from April 2023 (see note on methodology, below).

Cost of Living Payments are exempt from the Benefit Cap.

Note on methodology

This estimate is based on analysis using the UKMOD microsimulation model (version A3.23+, developed by the Institute for Social and Economic Research (ISER) at the University of Essex) and data from the Family Resources Survey. We applied output on the percentage change in households affected by the benefit cap to DWP benefit cap caseload data.

Further reading

About the author: Esme Kirk-Wade is a statistics researcher at the House of Commons Library, specialising in social security

Image: Job Centre Plus by HelenCobain under CC BY 2.0

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