Middle-class households in the UK see first income drop in two years following inflation surge

Disposable incomes fell for 60% of UK households last month, according to Asda’s latest Income Tracker, marking the first decline for middle-income families since September 2023.

The contraction follows a sharp rise in inflation, which reached 3.8% in July – the highest level so far this year – driven by sustained increases in essential living costs.

Data collected by the retailer shows:

• The cost of essentials (food, drink, transport, etc) rose by 5.1% year-on-year, putting further pressure on household budgets.
• Households under 30 experienced the largest increase, at 5.6%, driven mainly by higher spending on transport and other categories facing faster inflation. This poses a particular challenge for this group, as they devote the largest share of their gross income to essential expenses
• Middle-income households (approx. £41,000 gross annual earnings) saw disposable income decline by 1.6% in July, the first drop in almost two years.
• Lower-income households experienced an 11.1% drop in spending power, resulting in a shortfall of £73 per month between earnings and essential spending.
• Although higher-income households remain more insulated – with income growth still outpacing rising costs – the gap is narrowing.
• Looking ahead, earnings growth is expected to outpace inflation, supporting further increases in spending power across households. However, the benefits will vary, with working-age households likely to see stronger improvements than pension-age households.

As earnings growth begins to ease and tax contributions rise, all households are likely to feel the squeeze in the months ahead, with inflation expected to stay above the Bank of England’s 2% target well into 2026.

“Inflation accelerated to 3.8% in July, the highest rate since January last year. The rise was driven primarily by sharp price increases in essentials, such as food and non-alcoholic beverages,” said Sam Miley, Head of Forecasting and Thought Leadership at Cebr.

“This has been reflected in the Income Tracker, which showed only modest growth of 2.4% in the year to July. While wages are expected to rise over the remainder of the year, persistently high inflation will put continued pressure on purchasing power, weighing on further gains in the Tracker.”

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