Disposable income fell to nine year low in first quarter of 2012

Disposable income fell to a nine year low in the first quarter of this year according to the Office for National Statistics.

The figures, which take into account the effects of inflation, suggest that disposable income fell by 1% on figures from the previous three months.

Average income was calculated based on income after taxation. Household income on average per head and before tax fell by 0.6% on the previous quarter, to its lowest level since the second quarter of 2005.

Savings levels also dropped during the same period, according to the ONS, by 0.5% to 6.4%, with gross household savings at £17,000 million compared to £18,300 million in the last three months of 2011.

Frozen salaries and rising inflation, along with a growing population which means that average figures are based on a growing number of people, all may have had some impact on the changing figures.

Pressure on household budgets could ease in 2013

The Centre for Economics and Business Research (CEBR) released a report yesterday suggesting that disposable income levels could start to rise again next year due to “a combination of higher tax-free personal allowances and falling inflation” resulting in budgets stretching further next year.

The CEBR predicts that inflation levels will drop from the current 2.4% to 1.6% by spring 2013.

Senior economist at the think tank and main author of the report, Scott Corfe, said:

“Slowing price growth will boost household spending power and also give the Bank of England room for manoeuvre in keeping interest rates on hold until 2016,”

“However, consumers have been hit hard by declining living standards in recent years. Even with growth from 2013 onwards, real disposable incomes aren't expected to surpass their 2010 peak level until 2015."

Head of Macroeconomics at Cebr, Charles Davies, said:

“Economic indicators we produce, such as the Asda Income Tracker, are starting to show the squeeze on household spending power coming to an end. This process is likely to continue over the coming quarters, with some reasonable growth in spending power come next year.”