Poorest groups hit hardest by inflation

Average annual inflation has been 1 percentage point per year higher for the poorest fifth of households than for the richest fifth since 2008, according to a new analysis from researchers at the Institute for Fiscal Studies.

The research findings appear in a pre-released chapter from the IFS 'Green Budget' 2014 publication.

Key findings

  • Average living standards have fallen dramatically since the recession, as income growth has failed to keep pace with the rate of inflation. IFS projections suggest that real median household income in 2013-14 is more than 6 per cent below its pre-crisis peak.
  • Households have differed in their inflation experiences. On average, low-income households have benefited less from falls in mortgage interest rates and have been hit harder by high food and energy price inflation than high-income households. Over the period 2008-09 to 2013-14, the inflation rate for low-income households was, on average, 1 percentage point higher per year than that for high-income households.
  • As a result, the average price level faced by households in the bottom quintile rose by an estimated 7.1 percentage points more than that faced by households in the top quintile between 2007-08 and 2013-14.
  • The declines in living standards experienced by low- and high-income households appear very similar once differences in their inflation rates are accounted for. Although incomes at the bottom appear to have fallen less than incomes at the top, real living standards have fallen by similar amounts across the distribution.

Abi Adams, a co-author, said: 'Different types of households have had quite different experiences of inflation over the past few years... Differential inflation has largely undone what would otherwise appear to be a significant reduction in inequality'.

Source: Abi Adams, Andrew Hood and Peter Levell, 'The IFS Green Budget: The Squeeze on Incomes', Institute for Fiscal Studies
LinksChapter | IFS press release | BBC report | Guardian report

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Publication date: 
Jan 30 2014