UK households experienced a decline in disposable incomes during the first three months of 2026 as rising prices and additional wealth taxes reduced average spending power, according to official data.
ONS reports 0.8% drop in real household disposable income
The Office for National Statistics said that an increase in the consumer prices index measure of inflation in the first quarter, combined with higher capital gains tax receipts, caused real household disposable income to fall by 0.8% from January to the end of March. This marked the fourth quarter in the last five where disposable incomes have decreased, the ONS stated in its latest economic assessment.
Andy Burnham pledges to tackle cost of living
Andy Burnham, who is expected to replace Keir Starmer as prime minister next month, used a major speech on Monday to signal that addressing the cost of living and declining living standards would be central to his premiership. He said: “We need a new determination to raise living standards of every person in this land. And we must accept that to do that, to fix the economy and the country, we need to change politics and we need to do it now.” Burnham announced a 10-year mission to raise living standards across the UK and reduce the cost of essentials such as water, energy, and transport.
GDP growth confirmed at 0.6% in first quarter
The ONS confirmed early estimates showing the economy grew by 0.6% in the first quarter, but GDP growth over the previous year was revised down slightly from 1.4% to 1.3%. All three main sectors of the economy — services, production, and construction — expanded in the first quarter, with the largest contribution from services, which grew by 0.8%.
Thomas Watts, an investment manager at private bank Julius Baer, said the figures represented a boost for Chancellor Rachel Reeves in what are expected to be her last weeks in office. “Encouragingly, the composition of growth was more balanced than in recent quarters. Both construction and production posted gains of 0.2%, signalling a modest but welcome broadening in economic momentum,” he said. “The fact that all three main sectors contributed positively will be particularly reassuring for policymakers, both at Threadneedle Street and in Downing Street.”
Household saving ratio edges down
The household saving ratio, which measures the proportion of disposable income that households save rather than spend, edged down marginally from 9.6% in the last three months of 2025 to 8.9%. During the pandemic lockdowns, households pushed the saving ratio to 27.5% when they were unable to spend much of their income. It increased again during the politically unstable period before the last election, after which it has steadily declined, though it remains above pre-pandemic levels.
Phil Shaw, an economist at Investec, said the first quarter “marked a decent start to 2026,” but predicted that attention would soon turn to the negative impact from the recent rise in energy prices. “We envisage growth coming close to a halt in the third quarter, although the level of the saving ratio will give households in aggregate a cushion to absorb cost increases without an abrupt interruption in spending,” he said. “Thereafter the unwinding of the energy price spike should form a tailwind and help to support expenditure and economy activity more widely.”
Bank of England expected to hold rates
Shaw added that the Bank of England was likely to view the figures as showing the economy remains robust, although without the prospect of much growth in the next six months, allowing it to avoid interest rate rises. He said: “We have lowered our forecast of the peak in inflation over the remainder of the year from 4.0% to 3.1% … Nevertheless we still consider that the [Bank] will adopt a cautious approach to policy and guard against lingering threats of more persistent inflationary pressures. We remain of the view that a rate increase is off the table, but that the committee will maintain the Bank rate at 3.75% for the remainder of the year, with rate cuts coming into view over 2027.”
