Disposable income falls for first time since 2011 as inflation bites

Money

Households saw their disposable incomes fall last year for the first time since 2011, according to new official figures. 

Disposable incomes fell by 0.1 per cent on average, mainly due to rising prices which have left households with less left over after essentials. 

Furthermore, the amount of money households saved in cash fell as well, the latest ‘experimental’ data from the Office for National Statistics reveals.  

The proportion of total disposable incomes that households were able to save fell from 2.9 per cent in 2016 to 0.9 per cent last year.   

ONS data: Figures today show that disposable income has fallen for first time since 2011

ONS data: Figures today show that disposable income has fallen for first time since 2011

ONS data: Figures today show that disposable income has fallen for first time since 2011

Although this is not historically low, it is the lowest annual cash savings ratio since 2008.

One expert believes the amount being tucked away for a rainy day has suffered thanks to low savings rates and inflationary pressure – but may also be because more people are saving into a pension.

Kate Smith, head of pensions at Aegon, said: ‘Although on the face of it today’s figures presents a gloomy outlook, it doesn’t tell the whole story.

‘Inflationary pressure in particular has squeezed purchasing power, leading to a fall in disposable income for the first time since 2011.

‘If you look deeper though, it may be that the long term forecast is more positive as auto enrolment means nine million more people are saving towards their long-term future through their employer’s scheme.

The cause: The purple part of the graph, representing inflation, helped drag down disposable incomes in 2017

The cause: The purple part of the graph, representing inflation, helped drag down disposable incomes in 2017

The cause: The purple part of the graph, representing inflation, helped drag down disposable incomes in 2017

‘Cash savings have suffered as a result of an historically low base rate, translating to a continuation of unattractive interest rates from high street accounts and Isas.

‘But brighter times are on the horizon. Interest rates are widely expected to rise in May, and savers may be encouraged by the introduction of better rates filtering onto the market.

‘It’s important that people have the flexibility of a cash buffer for any unexpected spending and in times of uncertainty we would encourage people to get into positive savings habits to build financial security for both the short and long-term.’

Inflation sat at 1.8 per cent in January 2017 before rising steadily to 3.1 per cent in November. 

Much of this inflation was driven by the depreciation of sterling, but other factors, such as rising food costs were to blame.

The latest figure, for February, showed it had slowed to 2.7 per cent.

However, with the price of energy looking likely to increase and oil prices also rising – which will have a knock-on effect at the petrol pumps – there is likely to be a further squeeze on families.

The cost of this squeeze is reflected in these ONS disposable income figures.

The data shows that the fall was due to a 2.4 percentage point contribution from the impact of inflation and a 1.1 percentage point contribution from the rise in taxes on income and wealth.

This was partially offset by a 2.8 percentage point contribution from the rise in wages and salaries.

The ONS says the annual fall in the cash savings ratio can be partially attributed to a second successive decline in gross saving.

Low: People are saving less - but this could be offset by pension contributions

Low: People are saving less - but this could be offset by pension contributions

Low: People are saving less – but this could be offset by pension contributions

Gross saving fell 68 per cent between 2016 and 2017, from £29.6billion to £9.6billion, its lowest level since 2008.

Although wages and salaries rose by £28.7billion, this was more than offset by a rise in household spending of £43.5billion in the latest year.

This increase in spending and consequent decline in saving, has driven the fall in the cash basis saving ratio.

The ONS say the data is ‘experimental’ and is continually reviewing the methodology used.

Earlier in the month, it – alongside the Bank of England – released data that showed the savings ratio last year dropped to just 4.9 per cent, a record low.

The data series released today removes pension contributions from the equation, which is one of the reasons it shows a saving ratio of just 0.9 per cent.

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