The rising cost of essential items such as oil, utility bills, food and clothes are set to leave the average household with £910 a year less to spend in 2011 than two years ago, said the Centre for Economics and Business Research (CEBR).
Disposable incomes are due to fall by two per cent in 2011, following a 0.8 per cent drop in 2010, as cash-strapped consumers suffer the biggest hit to their finances apart from during the Second World War and the recession following the First World War, it added.
It forecasts that inflation will average 3.9 per cent in 2011 – its highest since 1992 – as January’s rise in VAT to 20 per cent from 17.5 per cent and the rising cost of oil and other commodities continue to drive up prices.
Pay packets, on the other hand, will rise just 1.9 per cent as unemployment remains high and the public sector makes cut-backs.
But the Government’s austerity drive is “only a minor element in the squeeze on household incomes”, the soaring cost of commodities being the major factor.
Commodity prices are being driven higher by surging demand from emerging economies such as China and supply shocks including the conflict in Libya, which is impacting the price of oil.
The lack of consumer spending power means the economy will only grow by one per cent in 2011 and will be “subdued” for the next two or three years, said the consultancy. Its forecast is significantly below the 1.7 per cent predicted by Government’s Office for Budget Responsibility.
The CEBR’s report echoes the views of Bank of England governor Mervyn King who earlier this year said consumers’ finances were facing their biggest squeeze since the 1920s.
A spate of retailers have reported tough conditions on the high street in 2011.