Thirteen years’ worth of inflation in the past five has left households £2,900 worse off

The past five years of a near-continuous cost of living crisis have caused the real incomes of typical working-age households to fall rather than grow, leaving them £2,900 (7.9 per cent) worse off this year compared to a world of normal inflation, according to new analysis published today (Thursday) by the Resolution Foundation.

The report Counting the cost, funded by the Nuffield Foundation, assesses the toll of three crises (the post-pandemic supply shock, the invasion of Ukraine, and conflict in the Middle East) that have already delivered 13 years’ worth of ‘normal’ inflation in five, with inflation peaking at 11.1 per cent and prices nearly 30 per cent higher in August 2026 than July 2021.

The report details how energy has been at the epicentre of this price shock. By the autumn of 2022, household energy bills had more than doubled since the start of the crisis. Higher energy costs then bled into other prices: food inflation peaked at nearly 20 per cent in March 2023, and services inflation reached 7.4 per cent in July 2023, its highest level in more than three decades. Household energy bills and food together account for a quarter of the change in the price level over this period.

The pain felt from these price rises has not been shared equally. Inflation was steepest for essentials, which make up a larger share of poorer households’ spending. As a result, the rise in non-housing costs since before the pandemic has been around one-sixth bigger for the poorest tenth of households than for the richest tenth.

Overall, the report finds the real incomes of a typical working-age household this year (2026-27) are £2,900 a year lower than they would have been compared to a world in which inflation had stayed at 2 per cent over the past five years. The hit has been similar in scale for households across the distribution. Despite tens of billions in government support, the scars from the cost of living crisis are no smaller for low-income families, and much harder to bear.

The analysis also confirms that between 2020-21 and 2026-27, real median income after housing costs for non-pensioners looks set to fall by 1.3 per cent (£450). Incomes at the 25^th percentile are set to fall by 1.2 per cent (£270), while better off households at the 75^th percentile will see marginal income growth of 0.3 per cent (£130).

Families have responded to higher prices by heating their homes less – with an extra 1.7 million households saying they were unable to keep warm enough in 2022-23 compared to 2021-22 , 950,000 of whom were in the poorest 40 per cent of the population. The poorest tenth of neighbourhoods cut energy use by 15 per cent more than the richest in response to price rises in 2023. There were also larger cuts in usage in colder areas, meaning the biggest adjustments happened in the places where those most vulnerable to a gas price shock are more likely to live.

Arrears are also mounting as families fall behind on priority bills, such as energy, water, Council Tax and rent. By March this year, almost one-in-five (18 per cent) households in the poorest half of the country were behind on a priority bill, up from one-in-ten (10 per cent) in September 2020. The total owed to energy suppliers has more than tripled in real terms since 2018, to £5 billion, while Council Tax arrears in England have more than doubled since 2012-13 (up 117 per cent to £7.5 billion in 2026-26).

As the Government considers fresh cost of living support in the upcoming Budget, the authors warn that recent help was expensive and poorly targeted. The Energy Price Guarantee alone cost over £20 billion and was paid regardless of need. The country cannot afford to repeat that approach.

Instead, any new support should be targeted at the poorer families who have fared worst over the past five years – heating their homes less, taking on more debt, and falling behind on their bills more often – with energy bills the clear priority.

James Smith, Chief Economist at the Resolution Foundation, said:

“Having experienced 13 years’ worth of inflation over the past five, families across the country are struggling with the cost of living. Unfortunately,  help is needed just when the public finances leave less room than ever to provide it.

“While the hit to incomes from rising prices has been felt right across the board, the hardship has not been equally shared. It is poorer families who have cut back hardest on heating and are falling behind fastest on essential bills, and conflict in the Middle East is set to keep energy prices high.

“The Government can’t borrow its way out of this, and repeating the expensive blanket support of 2022 isn’t an option. Any new help must be squarely targeted at the poorer families facing the greatest hardship – starting with their energy bills.”

Alex Beer, Assistant Director of Strategy at the Nuffield Foundation said:

“Five years of unusually high inflation have had a substantial impact on household finances, with lower-income families facing the greatest pressure. By showing how rising energy and food prices have reduced living standards and made it harder for people to pay essential bills, the report provides timely and valuable evidence on the consequences of an extended costs of living crisis.

“At a time when policymakers face difficult choices and public finances remain constrained, understanding who has been most affected and why is essential to designing effective policy responses. This work forms part of a wider programme of research funded by the Nuffield Foundation examining the consequences of the recent conflict involving the US, Iran, Israel and the wider region.”