(Dec 30): Britain's cost-of-living squeeze will tighten in 2023, with families shouldering higher tax payments at a time when energy bills and interest rates also are soaring.

The Resolution Foundation said the average household will pay £1,000 (RM5,307) more in taxes next year and £900 more for electricity and natural gas. About two million mortgage holders will suffer an average increase of £3,000 in their annual payments, the research group said on Friday.

The tax increases from Prime Minister Rishi Sunak's government were aimed at stabilising the public finances and bolstering investor confidence in UK assets, which was shaken by unfunded tax cuts announced by his predecessor in September.

The cumulative effect of rising costs will be one of the worst squeezes on living standards in memory, extending a trend that started this year when inflation leapt at its strongest pace in four decades. Household disposable incomes already fell by the most in a century in 2022 and are set to fall by a further 3.8% next year, the report said.

"From a cost-of-living perspective, 2022 was a truly horrendous year — far worse than any year in the pandemic or financial crisis," said Torsten Bell, chief executive officer of Resolution. "For families' living standards, things will get far worse in 2023 before they start to get better."

The Resolution Foundation said the one positive of the outlook was that slower demand from consumers will help the Bank of England bring double-digit inflation back down to its 2% target.

The UK labour market remains the biggest variable impacting inflation, the report said, and will be determined by whether firms raise prices to attract or retain staff. But with signs of vacancies cooling, and short-term unemployment and redundancies rising, it is unlikely that workers will be able to demand inflation-busting pay increases that could spur a wage-price spiral.

Either way, peaking inflation is unlikely to bring relief to households. The central bank has raised rates nine times over the past year to battle spiralling inflation, and its key rate is expected to peak in 2023 at around 4.5%, bringing significant pain for mortgage holders.

The cost of a two-year fixed-rate mortgage is now at around 5.8% — substantially higher than offers available in 2021 — and the two million households set to refinance next year will face a large increase in their monthly repayment costs.

The Resolution Foundation added that a further one million mortgage holders on floating rates will continue to feel the impact of hikes in the base rate.

"Looking at what 2023 has in store, the dominant feature is that tomorrow will be worse than today," the report said. "The fact that it isn't quite as bad as economists previously feared will offer little comfort."