UK’s mini living standards boom ends as inflation starts to bite

The UK’s mini living standards boom of recent years has ended with income growth for typical working age households more than halving to just 0.5 per cent this year, the Resolution Foundation’s annual living standards audit will warn later this week.

The audit – a detailed analysis of the state of living standards across Britain today – will show that the UK enjoyed a mini living standards boom between 2014 and the beginning of 2016, with typical working age household incomes growing at their fastest rate since the early 2000s.

This mini-boom was driven by three factors – historically low inflation (which hovered at or near zero for most of 2015 and the first half of 2016), a long overdue return to wage growth (average weekly earnings growth peaked at 2.8 per cent in the summer of 2015) and fast-rising employment (which increased from 72.9 per cent in April 2014 to record highs of around 74.4 per cent in April 2016).

However, the living standards story of this year has been fast-rising inflation, which reached 1.6 per cent in late 2016 without nominal pay growth rising by enough to match it. As a result the Foundation warns that current household income growth is far more subdued this year than during the recent mini-boom.

It estimates working-age household incomes have grown by just 0.5 per cent this year (2016-17), down from 1.5 per cent in 2015-16 and 3 per cent in 2014-15. This year is the weakest income growth since 2012-13, when incomes actually fell.

In more welcome news, housing costs have not been dragging on income growth as they did in the mid-2000s due to falls in mortgage costs, and pensioner incomes are growing more strongly.

The Foundation adds that with inflation set to continue rising over the rest of 2017, and with welfare cuts only just starting to be rolled out over the parliament, household income growth could further weaken in the coming years, unless action is taken.

Stephen Clarke, Economic Analyst at the Resolution Foundation, said:

“After a tight squeeze during the crisis, working age households have enjoyed a living standards mini-boom in recent years. The combination of historically low inflation, record employment and a long overdue return to decent pay rises helped power the strongest income growth in over a decade between 2014 and the beginning of 2016.

“But fast rising inflation this year has brought this all too short mini-boom to a sharp halt as pay rises have not kept up.

“While there’s little that the government can do to stop rising inflation eating into people’s living standards this year, there is still plenty of scope to boost pay packets and get employment rising again.

“Closing the large jobs gaps that still exist across big cities like Birmingham and Liverpool would boost household incomes and help send Britain to the top of the global employment league. And of course tackling Britain’s chronic productivity problems holds the key to maintaining decent pay growth in the years ahead.”