The UK’s misery index is set to hit its post-pandemic peak in the next few months, driven by an increase in consumer prices.
The misery index, developed by the American economist Arthur Okun in the 1960s, is calculated by combining inflation and unemployment into a single metric of economic hardship. The logic of the index is that inflation is less painful when the jobs market is booming, and unemployment is less painful when inflation is low.
The Bank of England expects the rate of price increases to peak at 7 per cent in the second quarter of this year, more than three times the central bank’s target rate, while unemployment is expected to fall to 3.9 per cent. This peak in inflation is set to coincide with a major increase in National Insurance contributions and the energy price cap, both of which will take effect in April.
Inflation is expected to erode the 6.6 per cent growth in real wages during the initial phases of the pandemic. By 2026, according to the Office for Budget Responsibility, real wages will still be lower than they were in 2008.
Employee National Insurance contributions are due to rise by 1.25 percentage points in April, equivalent to a 10 per cent increase in the amount paid. That will be the tenth increase to employees’ National Insurance rate since the tax’s introduction, in its modern form, in 1975. The tax has never been cut.
The Resolution Foundation has warned that the impact of the increase will be borne disproportionately by young people and low earners. National Insurance is paid only on earned income and so is not paid by anyone over the retirement age.
The raising of the energy price cap in April is expected to raise average energy bills by £648. Analysts have warned that, without government intervention, prices could rise by an additional £330 in October.