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Families could suffer a £2,000-a-year average hit from the cost of living crisis. This figure is based on a calculation which overstates the impact of inflation, by factoring in both how much prices will rise and how much ‘real wages’—which already allow for inflation—will fall. Families to be left £2,000 a year worse off as cost of living continues to soar The Daily Mirror has reported on the rising cost of living by claiming families could be left over £2,000 poorer this year. However, its calculation essentially factors in some price rises twice, overstating the impact of inflation. Stay informed Be first in line for the facts – get our free weekly email Subscribe The print version of the article, which was splashed on the Mirror’s front page, adds up estimates for various price rises, including: To this it added £600 due to the rise in National Insurance and the effect of freezing income tax thresholds, based on an estimate from the Resolution Foundation of the annual cost for the average household. There’s nothing wrong with simply presenting these additional costs to illustrate how the cost of living is changing. And it’s reasonable to consider these costs in the context of average income changes, to understand whether the average working household will actually feel worse off. (For example, if household spending was forecast to rise by £1,500 a year, but earnings by £1,000 a year, you could forecast that people will feel £500 a year worse off.) But the Mirror did something different. To get to its £2,035 a year total, it added together the various price increases and tax changes with the estimated fall in real wages, which it estimated to be £260 (assuming real wages would fall as much this year as they did last year). Real wages is a measure which adjusts nominal wages (the actual wages people receive before tax) by the rate of inflation. Because real wages already take price rises into account, adding that figure to the rising prices of the goods and services mentioned (energy, housing, petrol, car cover and groceries) essentially counts the inflation of these items twice, making it look like the cost of living is rising faster than it probably is. The Bank of England forecasts average earnings to rise by 3.75% in 2022. If the Mirror had factored in rising average incomes instead of using a real wages figure, its total estimate for the rising cost of living would have likely been significantly less than £2,035 per year. It’s also worth noting that most of the costs mentioned by the Mirror (all except car insurance) are for an entire household, but the real wages estimate is for just one worker, which may skew the overall total—arguably it would be more relevant to look at a figure for household income. Also, some of the Mirror’s estimates for price rises (car insurance and petrol) are based on historic rather than forecasted trends. A Mirror spokesperson told Full Fact: We stand by £2,000 as a very fair estimate of the kind of increase an average family can expect - and in fact this may still turn out to be a conservative estimate. While we take your point about inflation and real wages, that only applies to a small part of our total figure and we've been very conservative elsewhere - for example we have not even begun to include costs such as clothing, alcohol and car prices which featured heavily in December's ONS data. Nor have we included council tax, rail fares or mobile and broadband prices, all of which will be contributing to inflation. The Mirror’s right to say that if it hadn’t used a real terms wages figure, there were additional costs it could have considered in estimating a total. However, because it did use a real terms wages figure in its original estimate, that calculation did essentially factor in the changing prices of the items mentioned above—as well as counting price hikes on items it split out, like energy and petrol, twice. Various organisations including the Resolution Foundation, the Financial Times and the House of Commons Library have put out estimates for how individual price and tax rises might affect household finances in the coming year. One that takes into account changes to all the factors which affect the cost of living (earnings, benefits, taxes and price increases) is the Bank of England’s estimate for real post-tax labour income, which it forecasts to fall by 2% in 2022. This only applies to working people, because it looks at the real change in labour income when adjusted for taxes, benefits and prices. It also looks at total labour income across all households, not per household. The Office for Budget Responsibility (OBR) produces a similar estimate on a per person basis, and this applies to all households because it doesn’t just look at labour income. This forecasts real post-tax income per person will actually rise slightly in 2022, though crucially this estimate was calculated in September 2021 and may understate the cost of living squeeze by underestimating the level of inflation. For example, the OBR estimated inflation would be 4% in the final quarter of 2021, and peak at 4.4% during the second quarter of 2022. Inflation was actually 4.9% in the final quarter of 2021 and the Bank of England expects it to peak at over 7% in April.
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