-A basket of staple foods costs 40 per cent more
-Diesel is 45.8 per cent more expensive and car insurance 74.7 per cent
-CPI could climb to 5.5 per cent this year
By Sean Poulter
Families will be nearly £900 worse off this year after the biggest squeeze on living standards since the 1870s.
Soaring energy, food and petrol prices have massively outpaced increases in household incomes over the past year.
Roger Bootle, a leading economist and former Government adviser, says inflation is likely to go above 5 per cent – well ahead of the 2.8 per cent growth in incomes.
Roger Bootle, a leading economist and former Government adviser, said the last time earnings had risen less than prices for four years in a row was the 1870s
The resulting gap would see the disposable income of the average household fall by £858 this year.
‘Increases in areas like energy, food and petrol are having a really dramatic impact on household budgets,’ said Mr Bootle. ‘The increase in the cost of energy means inflation is likely to reach a higher peak than previously forecast. I don’t think we will see a return to growth in disposable incomes until the end of 2012.’
The adviser to Deloittes believes the official CPI measure of inflation could climb to 5.5 per cent this year. In May it was 4.5 per cent.
He said the decision by Scottish Power to increase its gas tariff by 19 per cent and electricity tariff by 10 per cent will make the situation worse because it will probably be copied by rivals.
He said the last time earnings had risen less than prices for four years in a row was the 1870s. Bank of England Governor Mervyn King has already suggested the squeeze is the worst since the 1920s.
A report yesterday shows that households have been suffering since at least 2006. While salaries are up by 13 per cent on that year, a basket of staple foods costs 40 per cent more and gas and electricity tariffs have leapt by 76 per cent.
Diesel is 45.8 per cent more expensive, car insurance 74.7 per cent and council tax 18.5 per cent. The basic state pension has risen by 20 per cent in the same period, according to the Office of National Statistics figures.
Incomes have been decimated by rises in VAT and national insurance and cuts in benefits and tax credits.
The ONS data shows a loaf of bread costs 50 per cent more than it did five years ago, while butter is up 57.7 per cent and milk 33 per cent.
Crop-ravaging droughts across Britain and Europe are likely to make food even more expensive.
And the fall in the value of the pound means imported food and other products are more expensive in the shops. Analysts at Ernst & Young say the fall in disposable incomes – the money left after tax and paying essential bills – over the past three years is ‘unprecedented’.
Holidays, home improvements, eating out and going to the cinema are now considered luxuries or avoided altogether. Households are spending less on food and clothing and the elderly in particular are turning down thermostats and limiting which rooms are kept warm.
Low mortgage rates are protecting some families against a financial meltdown. Families with a £150,000 loan on a two-year fixed rate deal are paying around £330 a month less than they would have five years ago.
However, some City analysts are calling for rate rises despite the fact this would push many households into the red.
Andrew Goodwin, senior economic advisor to the Ernst & Young ITEM Club, said: ‘The squeeze on household budgets is only going to intensify this year, as the gap between high inflation and subdued wage growth continues to widen.’
Richard Lloyd of consumer group Which? said: ‘Yet more price hikes are on the horizon, and there’s a limit to how much people can cut their spending on essentials.’