Income is lower than before the 2007–08 economic crisis, says think-tank

Recent debates about the squeeze on household incomes have suffered from a
lack of up-to-date information.

The latest data covering all incomes at a household level only goes up to 2011–
12, but new modelling work published by the think-tank The Institute for Fiscal Studies (IFS) provides a good guide to where we are now.

It shows that:

Real median household income in 2013–14 is more than 6% lower than before the economic crisis hit in 2007–08

The fall in median income has probably come to a halt in 2013–14

Better-off households have seen bigger proportionate real falls in income than poorer households if – as is usually the case – one assumes that all households face the average inflation rate;

But this equalising effect is largely undone by the fact that poorer households have in fact experienced significantly higher rates of inflation.

These are the headlines from work carried out by IFS researchers, which forms part of the forthcoming IFS Green Budget 2014 and is funded by the Nuffield Foundation with support from the ESRC through the Centre for the Microeconomic Analysis of Public Policy at IFS.

Incomes were hit harder at the top

Adjusting incomes for inflation using the CPI (which gives lower inflation than the RPI), and assuming that all households face the same inflation rate:

Median income (the income of the person in the middle of the income distribution) is more than 6% lower now than in 2007–08

Incomes 90% of the way up the income distribution (that is, at the 90th
percentile) have fallen by almost 9% since the recession;

By contrast, incomes at the 10th percentile are “just” 2.4% lower in 2013 –
14 than they were in 2007–08.

This pattern reflects the fact that earnings have grown much less quickly than prices, while benefit rates have largely, until this year, kept up with CPI

Looking forward, the recovery in wages combined with continued benefit cuts is likely to see this equalising pattern unwind.

But the poor have experienced higher levels of inflation

Many with mortgages – who tend to have relatively high incomes – have benefited from reductions in mortgage interest rates.

And food and energy prices, which form a bigger proportion of the spending of poorer households, have risen much faster than the average. Between 2008
and 2013:

CPI inflation was 20%; energy prices rose by nearly 60%; and food prices rose by 30%.

Taking account of different spending patterns across the population, including mortgage payments, IFS estimate that, since 2008, average annual inflation
has been 1 percentage point per year higher for the lowest-income fifth of households than for the highest-income fifth.

This means that, 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.

What happens next will depend on how different prices change.

If pressure on food and energy prices ease and mortgage payments rise again, IFS say we could easily see the reverse pattern in coming years.

Andrew Hood, an author of the report, said: “There have been a lot of claims made recently about changes in different measures of incomes and earnings.

"Our analysis puts together all the information we have to suggest that real
median household income is still more than 6% below its peak, but it looks like it stopped falling this financial year.”

Abi Adams, a co- author, added: “Different types of households have had quite
different experiences of inflation over the past few years.

"Those on lower incomes have typically experienced significantly greater inflation than those with higher incomes.

"Taking this into account can change our views about how the distribution of living standards has changed. Differential inflation has largely undone what wou
ld otherwise appear to be a significant reduction in inequality”.

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