People in their 50s and 60s are re-thinking their decision to take early retirement after being made poorer by Britain’s cost of living crisis, a thinktank has suggested.

The Institute for Fiscal Studies said the squeeze on living standards caused by the highest inflation rate in four decades was the likely reason why more 50- to 64-year-olds were looking for work.

But the thinktank said it was too early to say for certain whether the increase in economic activity seen among older workers in late 2022 was the start of a trend, and urged Jeremy Hunt to includes measures in this month’s budget to encourage more over-50s back into the labour market.

The chancellor is known to be looking at ways of reversing the trend in early retirement after the Treasury and the Bank of England identified the reduction in older workers as a key factor behind labour shortages. Changes to pension rules are among the options thought to be under consideration.

In a report, the IFS said: “The increase in economic inactivity since the pandemic is a focus for the current government, with policies aimed at boosting workforce participation expected in the upcoming budget.

“Most of the rise in inactivity has been among 50- to 64-year-olds. New data provide tentative indications that the trend may be turning – though it is too early to say for sure – likely reflecting financial pressures from the cost of living crisis.”

Official figures show that in the final three months of 2022 there was a marked pick-up in the number of 50- to 64-year-olds moving out of inactivity and back into the workforce.

The IFS said this was particularly the case for people who had given up work since the start of the pandemic, with those out inactive for less than three years accounting for 57% of the 197,000 50- to 64-year-olds moving out of inactivity.

The IFS said there were reasons to think that a turning point might have been reached and that the UK might continue to see higher flows out of inactivity in the coming months.

The fall in inactivity among 50- to 64-year-olds could be seen as evidence that some people were not as far removed from the labour market as previously thought, the thinktank added.

Xiaowei Xu, a senior research economist at IFS, said: “New data from the end of 2022 suggest that we may be seeing an uptick in older people returning to the workforce, and that more may follow. If ‘un-retirements’ continue, this could ease pressures on the labour market. But if the return is triggered by the cost of living crisis, it is no cause for wider celebration – it is a response to people becoming poorer.

“The more important question beyond the immediate term is whether future cohorts will follow recent cohorts in retiring early. The forthcoming budget should take a broad view of labour force participation, rather than just focusing on undoing what has happened since 2020.”