Economists say the cost of living crisis is over - here's why many households disagree

Yahoo

3 days ago

Talk to economists and they will tell you that the cost of living crisis is over.
They will point towards charts showing that while inflation is still above the Bank of England's 2% target, it has come down considerably in recent years, and is now "only" hovering between 3% and 4%.
So why does the cost of living still feel like such a pressing issue for so many households? The short answer is because, depending on how you define it, it never ended.
Economists like to focus on the change in prices over the past year, and certainly on that measure inflation is down sharply, from double-digit levels in recent years.
But if you look over the past four years then the rate of change is at its highest since the early 1990s.
But even that understates the complexity of economic circumstances facing households around the country.
For if you want a sense of how current financial conditions really feel in people's pockets, you really ought to offset inflation against wages, and then also take account of the impact of taxes.
That is a complex exercise - in part because no two households' experience is alike.
But recent research from the Resolution Foundation illustrates some of the dynamics going on beneath the surface, and underlines that for many households the cost of living crisis is still very real indeed.
The place to begin here is to recall that perhaps the best measure of economic "feelgood factor" is to subtract inflation and taxes from people's nominal pay.
You end up with a statistic showing your real household disposable income.
Consider the projected pattern over the coming years. For a household earning £50,000, earnings are expected to increase by 10% between 2024/25 and 2027/28.
Subtract inflation projected over that period and all of a sudden that 10% drops to 2.5%.
Now subtract the real increase in payments of National Insurance and taxes and it's down to 0.2%.
Now subtract projected council tax increases and all of a sudden what began as a 10% increase is actually a 0.1% decrease.
Read more:
Of course, the degree of change in your circumstances can differ depending on all sorts of factors. Some earners (especially those close to tax thresholds, which in this case includes those on £50,000) feel the impact of tax changes more than others.
Pensioners and those who own their homes outright benefit from a comparatively lower increase in housing costs in the coming years than those paying mortgages and (especially) rent.
Nor is everyone's experience of inflation the same. In general, lower-income households pay considerably more of their earnings on essentials, like housing costs, food and energy. Some of those costs are going up rapidly - indeed, the UK faces higher power costs than any other developed economy.
But the ultimate verdict provides some clear patterns. Pensioners can expect further increases in their take-home pay in the coming years. Those who own their homes outright and with mortgages can likely expect earnings to outpace extra costs. But others are less fortunate. Those who rent their homes privately are projected to see sharp falls in their household income - and children are likely to see further falls in their economic welfare too.