Low UK income growth leaves families ‘brutally exposed’ to surging inflation

Anaemic personal income growth in the UK since 2005 has left many households “brutally exposed” to rising inflation and the cost of living crisis, according to a leading think-tank.

The Resolution Foundation concluded in a report published on Monday that real household disposable income growth for working-age families averaged just 0.7 per cent a year in the 15 years leading up to the Covid-19 pandemic, sharply down from the 2.3 per cent per year between 1961 and 2005.

The most vulnerable groups were families in rental accommodation, single parents and those with young children, whose incomes on the eve of the pandemic were all significantly lower than the recorded median.

“Britain’s poor recent record on living standards — notably the complete collapse of income growth for poor households over the past 20 years — must be turned around in the decade ahead,” said Adam Corlett, principal economist at the Resolution Foundation.

In the UK, consumer price inflation surged to 9.1 per cent in May, the highest in three decades and above that of any other G7 country.

As a result, real household disposable income in the UK fell in the first quarter of this year for the fourth consecutive time. The Bank of England expects high inflation to persist longer than in other countries and rise to double digits in the autumn when the new energy bill price cap kicks in. Ofgem predicts the cap will rise by 42 per cent in October, after April’s 54 per cent increase.

Last month, chancellor Rishi Sunak announced a £15bn package of support for weaker households to help them cope with the cost of living crisis, including a one-off payment of £650 to around 8mn households in receipt of welfare payments.

But Corlett suggested that the only permanent solution to declining living standards was to raise “pay and productivity levels” as well as to strengthen the “social safety net” and reduce “housing costs”. 

Wage growth — which is usually strongly linked to improvements in productivity — has slumped, with Resolution Foundation analysis showing that the typical pay packet is no higher now than before the 2008-09 financial crisis. This represents a loss of £9,200 per year, compared to a world in which pay growth had continued on its pre-financial crisis trend.

The figures chime with Financial Times analysis which showed that in the last decade UK living standards grew at the lowest rate since the second world war, reflecting a lack of productivity growth.

The UK was one of the worst performers in Europe over the period from 2007-2018, with only households in Greece and Cyprus seeing less growth in the typical household income than those in Britain, according to the Resolution Foundation report.

Despite falls in living standards, the report noted that the UK had a good “recent record” on jobs growth for poorer households.

It found that between 2007-08 and 2019-20, the employment rate rose by 6 percentage points among the poorest half of the working-age population, compared to 2 per cent among the richest half.

Despite this success, the report concluded that it would be “practically impossible” for Britain to turn around its trend of declining living standards with sustained higher employment levels alone.