UK households faced a renewed cost of living squeeze in the first three months of 2025 amid increases in taxes and inflation, official figures show, despite the economy growing at the fastest rate in the G7.
The Office for National Statistics said an important measure of living standards – real household disposable income per head – fell by 1% in the first quarter after growth of 1.8% in the final three months of 2024, in the first quarterly decline for almost two years.
The households’ saving ratio – which estimates the percentage of disposable income Britons save rather than spend – slumped by 1.1 percentage points to 10.9%, although this remains historically high.
The signs of a fresh hit to living standards come despite the latest snapshot confirming that the UK economy grew by 0.7% in the first quarter, the fastest rate in the G7 group of rich nations.
Liz McKeown, the ONS director of economic statistics, said: “The saving ratio fell for the first time in two years this quarter, as rising costs for items such as fuel, rent and restaurant meals contributed to higher spending, although it remains relatively strong.”
Ministers had welcomed the initial first-quarter growth estimate as evidence that Labour’s economic policies were starting to bear fruit after a rocky first few months in office. However, the more detailed snapshot highlights the squeeze on living standards, which risks undermining Keir Starmer’s promise for households to feel the benefits.
Raising real household disposable income levels per person by the end of the parliament had been included by the prime minister among his six “milestones” for government in a major speech late last year, saying the metrics would “give the British people the power to hold our feet to the fire”.
While the measure fell over the course of the last parliament under the last Conservative government for the first time in modern history, it is expected to grow only marginally by the time of the next election.
The latest figures from the ONS showed the fall in the first quarter was driven by elevated levels of inflation and taxes on income. Before inflation, the ONS said, growth in gross disposable income was helped by a £5.9bn rise in wages and salaries, but was offset by a £4.4bn rise in taxes.
The fall in the households’ saving ratio was driven by a decline in non-pension savings, alongside a rise in consumer spending. While the fall could indicate higher living costs are hitting saving levels, some analysts said the figures signalled a recovery in consumer confidence.
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“The news that the household saving rate fell from 12.0% in Q4 to 10.9% in Q1 provides some encouraging signs that consumer spending growth will edge higher in the quarters ahead,” said Ruth Gregory, the deputy chief UK economist at the consultancy Capital Economics.
The independent Office for Budget Responsibility has forecast GDP growth of 1% for 2025 as a whole, but will revisit that projection in the run-up to Rachel Reeves’s autumn budget.
January to March was the period when exporters were braced for Donald Trump’s tariffs to come into force – prompting some to front-load sales to the US market.
The UK has since struck a deal with the US, which came into force on Monday morning, to mitigate the steepest tariffs – but the Bank of England governor, Andrew Bailey, has warned that trade policy uncertainty has clouded the outlook for the economy.