The UK economy is already in recession as the cost of living crisis has devastating effects on household incomes.

Average real disposable income will fall by an unprecedented 2.5% this year and remain 7% below pre-pandemic levels until 2026, according to a grim estimate from the National Institute for Economic and Social Research.

The UK economy is heading into a period of stagflation with high inflation and a recession hitting the economy at the same time, said Stephen Millard, NIESR Deputy Director for Macroeconomics.

The number of households living paycheck to paycheck will nearly double by 2024 to 7 million, including 5.3 million with no savings at all. The group said they will be forced into debt as rising electricity bills eat into revenue.

The recession warning, which NIESR said began this quarter and will run through early 2023, is a stark reminder of the challenges facing Boris Johnson's two prime ministerial contenders. Economists said the depth of the crisis will force the government to respond, suggesting a goal is needed instead of the old approach to managing finances.

NIESR also noted calculations showing that the economic gap between London and the rest of the UK is widening. This suggests that the government's flagship policy of flattening out less wealthy areas is failing.

The think tank suggested that the most vulnerable in the UK needed more help in the face of consumer price inflation, which it said would rise to nearly 11% this year. At the same time, retail price inflation, a broader measure, will reach 17.7%, the highest level since 1980.

The Bank of England is expected to raise interest rates to 3% next year. Unemployment is forecast to rise above 5% as demand falls.