Amid the squeeze on living standards, there are reasons to be hopeful

The financial squeeze tightens, and next two months will be quite a scary time for a lot of people in the UK. There will be the budget on 23 March, when it is expected that Rishi Sunak will confirm the increase in National Insurance contributions. Energy bills will be coming through then at much higher levels and general inflation will be reaching its peak.

All this will come on the top of higher interest rates, and we are likely to see the Bank of England increase rates to 0.5 per cent after its Monetary Policy Committee meets this week. So how bad will the squeeze be?

Start with what happens this week. The move to 0.5 per cent from the Bank is almost certain, and the financial markets expect the rate to go to 1 per cent by the summer. This will inevitably increase the cost of tracker mortgages, where the rate is linked directly to official rates.

Last month, when the Bank increased its rate from 0.1 per cent to 0.25 per cent, the average cost of this type of mortgage rose from 3.38 per cent to 3.53 per cent. So, by the summer, the typical rate could be around 4.5 per cent, maybe a bit more. However, fixed mortgage rates are generally on the increase, as we reported earlier this month. Rates there are creeping up too, but of course the issue for many people will depend on the length of their present fix, so the pain could be delayed until that fix expires. But that is a bet on interest rates in two, three or five years’ time and no one can say with any confidence what will happen then.

What about energy prices and inflation more generally? As far as energy is concerned, it looks as though the global costs are moving to a higher plateau. The surge in gas prices will subside later this year, but they won’t come back to the levels they were a couple of years ago, or at least that is unlikely.

The government can do something to help vulnerable people cope with the current peak and it will. The question is the best way to do so, so that people who are really struggling get the most assistance, but regular taxpayers don’t have to subsidise wealthy people with huge and hard-to-heat homes.

In any case, no government can do much about the global price of gas, and the environmental case for encouraging more efficient use of energy would point to higher prices, not lower ones. So in the medium-term, the best way forward, if energy prices do settle on a higher plateau, will be to encourage conservation in every possible way.

Will inflation more generally also settle at a higher level than we are used to? If it does, then modestly higher rates won’t be enough to pull it down. This, too, is a global issue and the leader will be the US Federal Reserve. It is expected to move rates up at its next meeting in March and markets are already worried about that.

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Common sense says that inflation will come back down a bit everywhere later this year, and that the increases in interest rates will not be too disruptive. But anyone who can remember the soaring price increases of the 1970s and 1980s will know that inflation is a rough old beast, and once it is out of its cage it is hard to push it back in again.

There is much more encouraging news on the fiscal front, at least as far as the UK is concerned. The government’s deficit is still huge, but it is narrowing faster than expected. Last week we got the public accounts for the first nine months of the financial year and the Office for Budget Responsibility (OBR) commented that borrowing was £13bn less than it had expected last October. It said: “That undershoot reflects stronger than expected receipts (thanks largely to a more resilient labour market and strong business profits) more than offsetting higher than expected spending.”

Now, £13bn is roughly the amount the National Insurance increase is supposed to raise, so you could say that Rishi Sunak does not need the money. If they do go ahead with that, then expect other taxes to rise by less than previously announced. But that also depends on the “more resilient labour market” noted by the OBR.

And that is really the biggest issue in the months ahead. If the economy goes on growing at a decent clip, and if the job market remains as strong as it is now, then everything starts to look better. But if growth slows, it is bad news for all. We are right to be scared by the squeeze on living standards, but we should be a little comforted by the evidence that so far, at least, the economy is growing fast.