2016 was a good year for living standards – but families didn’t splash out

Published on Wages & Income

Today’s annual Family Spending release contains the usual wealth of useful information on household spending patterns. It shows that overall spending was largely unchanged in 2015-16 (at £529 a week) relative to the previous year, once inflation is accounted for. Indeed, having fallen slightly from 2006 and then increased gently after 2012, average household spending is little changed (even a little lower) than in 2001-02.

The flat spending profile in the last financial year is somewhat surprising given that – as we’ve shown before – it was a relatively good year for income growth. One potential explanation is that households were wary of what was to come: as the ONS points out, consumer confidence has been broadly flat since the start of 2015. Given our projection for a slowdown in income growth – and potential reversal for many lower income households – in the coming years, such consumer caution may prove justified.

But it’s also worth remembering that spending patterns vary significantly across different households, with sizeable consequences for living standard judgements. Below we set out the Resolution Foundation’s five key charts that explain just who spent what in 2015-16.

Unsurprisingly, richer households spend more. On average, the poorest fifth of households spent just under £14,000 last year. In contrast, the richest fifth spent more than £45,000.

While they spend a lot more, the richest fifth of households spend a lot less relative to the poorest fifth than we might expect. Their incomes were more than five times higher last year, but their spending was just 3.3 times greater. And that ratio drops to just 1.6 in relation to spending on food and 2.7 on housing.

Poorer households allocate significantly more of their spending towards essential items. Taken together, food and housing accounted for 42 per cent of all spending among the poorest fifth of households last year. In contrast, the richest fifth of households allocated just 29 per cent of all their spending to these goods.

This difference in profile looks even starker measured relative not to overall spending but to income. On this basis, the poorest fifth of households directed 44 per of their income towards housing and food (and spent more than 100 per cent of their income in total on average). The same commodities accounted for 19 per cent of disposable income among the richest fifth of households.

Housing costs fall sharply across the age distribution. More than £3 of every £10 spent by under-30s last year was allocated to housing. In contrast, those aged 50-74 directed less than £2 in every £10 towards housing.

Housing pressures are most acute in London. London rents (net of Housing Benefit) were 81 per cent above the UK average in 2015-16, while mortgage costs were 33 per cent higher. Higher costs and the disproportionate number of renters in the capital mean that London accounted for well over one-quarter (28 per cent) of all UK rental payments last year and 15 per cent of mortgage expenditure, despite only representing 12 per cent of all UK households.

The spending of the different groups set out in these five charts matters considerably for our understanding of living standards. As we showed in our recent state of the nation report on living standards, headline inflation rates can over- and under-state cost pressures on different groups of households.

Over the last decade or so, much of the inflation recorded in the UK has been driven by increases in food, fuel and housing costs – compounding the pressures faced by lower income households who allocate a higher share of their spending to such essentials. A simple thought experiment shows that, had lower income households faced the same (lower) cumulative level of inflation as higher income households in the period between 2001 and 2016, they would have had additional spending power to the tune of £200 last year on average.

With rising inflation set to be the living standards story of 2017, understanding how this plays out across the income distribution, across age groups and across different parts of the country will be an essential part of responding to the potential challenges to come.