Household disposable incomes have fallen for the first time since 2011, according to new data released by the Office of National Statistics (ONS).
According to the ONS real household disposable income, measured on a cash basis, fell by 0.1 per cent year-on-year in 2017. This reduction in disposable income was driven by two factors: inflation and increased taxes on income and wealth.
Inflation was the main driver, contributing 2.4 per cent to the crunch in disposable income, compared to the 1.1 per cent from taxes.
As a result of the pound’s devaluation in 2016, the cost of importing goods rose in 2017, feeding into consumer prices. Compounding this was a rebound in energy prices.
For much of 2017, inflation was consistently above the Bank of England’s 2 per cent target rate. Despite this, the Bank of England held steady due to wider fears of an economic slowdown, not raising interest rates until November 2017.
The fall household disposable income, however, was offset by relatively good economic performance. According to the ONS, pressure on disposable incomes from taxes and inflation was partially offset by a 2.8 percentage point contribution from the rise in wages and salaries.
The fall in disposable income was also driven by the first quarter of 2017. As the ONS notes: ‘The fall in Quarter 1 (Jan to Mar) 2017, the largest fall since Quarter 1 2013, was the reason for the overall negative growth in annual RHDI in 2017.’ Despite negative annual growth, disposable incomes grew, albeit at a modest level, in the fourth quarter of 2017.
The amount saved by households also declined in 2017, the ONS data release showed. The organisation’s ‘cash based saving ratio’ fell to 0.9 per cent in 2017, from 2.9 per cent in 2016, the lowest rate since 2008.
There are various reasons behind this decline in household savings. Partly it is driven by the decline of disposable income – the less earnings households have spare, the less they will save.
At the same time, continued historically low interest rates have made saving less attractive, especially when compared to rates of inflation.
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