Inflation since 2008 crash has hit low-paid hardest

THE SQUEEZE on UK pay has meant much bigger wage cuts for high earners, but new figures now reveal that above-target inflation has hit households on low incomes most severely of all.

On average, the highest incomes tracked by the Institute for Fiscal Studies (IFS) have dropped by over eight per cent in real terms since 2007-8. Incomes at the lowest level have fallen by about two per cent on the same basis.

However, new research released by the influential think tank yesterday suggests that this is not the full story, finding that people on low pay face a much bigger squeeze from inflation.

Households earning less typically spend a much higher proportion of their income on items like food and energy, where prices have risen much faster than the consumer price index since 2008.

In comparison, people with higher incomes typically spend more money on mortgage interest repayments, which have been held down by ultra-low interest rates.

“Taking this into account can change our views about how the distribution of living standards has changed. Differential inflation has largely undone what would otherwise appear to be a significant reduction in inequality,” said Abi Adams, one of the authors of the report.

The IFS says that before adjusting for the different effects of inflation, incomes in the 90th percentile dropped by 6.3 percentage points more than the 10th percentile, but after estimating the different effects of inflation, the difference was only 0.7 percentage points. The research excludes the top and bottom five per cent of incomes from their data because of statistical uncertainty.

The grim findings also conclude that the years of pressure on pay and prices are not likely to be reversed soon: according to the Office for Budget Responsibility, real earnings will not return to 2009-10 levels for another four years.