The number of people living in dire poverty in Britain is 300,000 more than previously thought due to poorer households facing a higher cost of living than the well off, according to a study released on Wednesday.

A report produced by the Institute for Fiscal Studies found that soaring prices for food and fuel over the past decade have had a bigger impact on struggling families who spend more of their budgets on staple goods.

By contrast, richer households had been the beneficiaries of the drop in mortgage rates and lower motoring costs.

The study by the IFS for the Joseph Rowntree Foundation said the government method for calculating absolute poverty – the number of people living below a breadline that rises each year in line with the cost of living – assumed that all households faced the same inflation rate.

But in the six years from early 2008 to early 2014, the cost of energy had risen by 67% and the cost of food by 32%. Over the same period the retail prices index – a measure of the cost of a basket of goods and services – had gone up by 22%.

The IFS report said the poorest 20% of households spent 8% of their budgets on energy and 20% on food, while the richest 20% spent 4% on energy and 11% on food.

Poorer households allocated 3% of their budgets to mortgage interest payments, which have fallen by 40% since 2008 due to the cut in official interest from 5% to 0.5%. Richer households spend 8% of their budgets on servicing home loans.

As a result, the IFS concluded that since 2008-09 the annual inflation rate faced by the poorest 20% had been higher than it was for the richest 20% of households. That meant the official measure of absolute poverty understated the figure by 0.5% – or 300,000.

The report said, however, that poverty had not been systematically understated, and that in earlier years absolute poverty would have been lower using its new definition based on the different inflation rates facing rich and poor.

Peter Levell, a Research Economist at IFS said “In recent years, lower income households have tended to see bigger increases in their cost of living than have better off households. Official poverty measures do not take this into account and hence have arguably understated recent increases in absolute poverty by a small but not insignificant margin.”



Responding to the IFS research, Katie Schmuecker, policy and research manager at the Joseph Rowntree Foundation, said: “Costs rising faster than earnings causes problems for us all, but it is the poorest families who have faced the greatest pressure from rising prices over the past decade. Any plans at the next election to help improve family living standards must get to grips the high cost of essentials, as well as how to boost wages and incomes.

“The Living Wage – which recognises the cost of essentials in how it is calculated – is an important part of the answer, especially for the 5.2 million workers who earn below this rate. But it must be complemented by a wider strategy that includes measures to address the cost of essential goods and services, the nature of work at the bottom end of the labour market and how well the tax and benefit system work. Otherwise millions of struggling households will find it even harder to make ends meet – even as the economy recovers.”