The Inflation Rate is Higher for Lower-Income Households | The Real Impact

Analysis of new April 2022 inflation figures shows that lower-income households are experiencing higher inflation rates while higher-income households are experiencing lower inflation rates.

Using data from the ONS personal inflation calculator, NimbleFins investigated inflation rates across a range of household after-tax income levels from £1,000 per month up to £10,000 per month. The chart below shows the inflation rate dropping steadily as income rises.

At the lower end of incomes, households earning just £1,000 per month after tax have an inflation rate of 8.1%; at the higher end, household earning £10,000 per month have an inflation rate of 6.6%. The inflation rate for a typical household (median income of £2,617 per month) is 7.4%.

Why do lower earners suffer higher inflation? Some of the items that have gone up the most (essentials like energy) form a larger proportion of the household budget for those earning less.

But there is more to the story for lower-income households than just higher inflation rates. What do their household finances really look like now, in the face of these rates? In particular, are they able to pay higher costs, especially for 'essentials' like food and rent?

Lower-Income Households Face Monthly Shortfall for Essentials

Typical lower-income households won't have money to pay for cost-of-living increases, even for basic necessities.

Using the ONS personal inflation calculator, the NimbleFins team compared average spending levels for some bare essentials only like food and rent across three income levels. We found that households without a car earning £1,500 per month (after tax) are spending an average of £1,551 per month on essentials. This means that lower-income households spend more on basic necessities than they earn—meaning they do not have enough money each month to pay for the rising cost of essentials in this environment. In fact, they are £51 short each month. And that's without paying for 'extras' like alcohol, holidays, and pets.

Households without a car

(See the methodology section to see what we considered to be 'essential' and the various spending levels for these necessities.)

If they do have a car, households are in even worse shape, with those earning £1,500 per month seeing a shortfall estimated at £284 per month with current inflation rates.

Households with a car

Biggest Cost Increases

The biggest contributors to cost-of-living increases vary by income level.

From lower to higher incomes, there is a shift in which items contribute the most to cost-of-living increases—for example, where lower-income households are struggling with higher grocery bills, higher-income households with £10,000 a month of income are taking the food-related inflation hit in the form of higher restaurant charges when eating and drinking out.

The table below shows, for various income levels, which 5 items are contributing the most to cost-of-living increases (and the estimated cost-of-living increase in GBP). For this analysis, we used the ONS estimate for average spending across all categories of spending (not just essentials).

Biggest contributers to cost-of-living increases by monthly, a/t household income

This data shows us how lower-income households are feeling the impact from basic necessities while higher-income households are more easily able to absorb cost rises for the essentials (as evidenced by the fact that some more optional spending items like homewares, eating and drinking out, and buying cars are amongst the biggest contributors to cost-of-living increases).

Lower income households are mostly affected by energy bill rises. They also are being most impacted by rising rent (or homeowner housing costs), food and drink, and petrol or diesel costs.

However, the energy situation is so significant that energy price rises are affecting even the highest-earning households, as you can see in the table above (e.g. households with £10,000 of monthly earnings are paying £59.85 extra each month for energy, making energy the 2nd largest contributor to their cost-of-living price rises).

The typical household (£2,617 of monthly after-tax income, which is the median figure) is mostly affected by energy bills (an extra £43.02 per month), homeowner housing costs (£23.58 extra per month) or rent (£21.93), food and drink (£22.45), and petrol/diesel (£21.45).

In contrast, very high-earning households with £10,000 of monthly income are feeling the pinch for more luxury-related spending like buying vehicles, spending on furniture and other homewares, and eating out.

Methodology

For the initial chart showing inflation rates by income level, we put varying income levels into the ONS personal inflation calculator, selected for the calculator to use the average spending for that income level, and took the resulting 'personal inflation rate for your overall spend'.

Note: According to the ONS, personal inflation rates from the calculator differ from the headline measure of consumer price inflation, the CPIH, as more thorough weights and methods are used for the CPIH, in line with international guidance.

For the 'Lower-Income Households Face Monthly Shortfall for Essentials' section

For this section, our team looked at stripped-back budgets where households only spend money on 'essentials' (e.g. food, rent, energy, etc.) and not on costs that could be considered optional or purchases that could be put off (e.g. clothing, holidays, alcohol, pets, etc.). We considered 'essentials' only for a few reasons. Firstly, they are (mostly) required to live and work. Secondly, they are budget items for most households (unlike, say, pets or tobacco) so the ONS numbers will be more reliable. Thirdly, at times of financial stress households may delay the purchase of 'less essential' items like furniture, clothing or holidays.

Note: some households will certainly consider some of the items in our non-essential list to be essential, which would further impact the study results.

Essentials

Non Essentials

Note: we assumed the households rent instead of own their homes. Households with a mortgage or who own their home without a mortgage would have different average spending.

For 'Biggest Cost Increases' section

For this analysis, we used the ONS estimate in the calculator for average spending across all categories of spending (not just the essentials).