Over the last several years, many in the UK have complained that young people have done less well than the old. Until recently this has been true. A big part of the reason is housing costs. In the past five years, the average house price has risen by roughly a third, also pulling up rents. Subdued wage growth is another important piece of the puzzle. Since 2009, earnings growth has averaged 1.9% per annum – less than half the 4.2% level seen in the pre-great recession period.

 

However, in 2018 this has already started to change and the future is looking brighter for the young. According to the Office for National Statistics’ ASHE dataset, in 2018 mean weekly pay rose 3.2% among the under 30s, 4.5% for those aged 30 to 49 and just 1.1% for the over 50s.

 

In order to asses what impact this has on living standards, we must also consider the change in the cost of living. In order to do this, Cebr has developed an age-based measure of inflation.[1] From this, we see that in 2018, inflation for the under 30s stood at 2.4%, compared to 2.8% for those aged 30 to 49 and 2.9% for the over 50s. This means that in 2018, the under 30s saw their real pay (which is closely linked to living standards) improve 0.8%, the 30 to 49 year olds enjoyed an increase of 1.7%, but the for the over 50s real pay declined 1.8%.

Looking ahead this trend is set to continue, both in terms of faster wage growth and lower inflation among the young. Cebr analysis suggests that wage growth among younger workers will outpace the overall labour market by about 1 percentage point per annum in the next five years. Sought-after IT skills and labour shortages are set to provide a disproportional wage boost for younger workers. On the other hand, the rising number of over 50s in the labour market has seen a saturation of specific skills and roles, pushing down this group’s wage growth.

 

These labour market changes are occurring alongside major shifts on the consumption side. The UK housing market is in the midst of a major U-turn with Cebr expecting house prices to decline in 2019, at least in some regions. Rental growth in 2018 was the slowest in eight years and is set to decelerate further this year.[2] This will keep down inflation for younger households.

 

Another factor contributing to the lower inflation rate for the younger age groups is that their spending patterns are more flexible and they are thus better able to take advantage of technology-enabled gains. The use of price comparison apps, automatic switching of energy, phone etc. providers and other similar technologies will be most advantageous for younger, more flexible consumers. Similarly, young people tend to take more advantage of the ability to use shopping on-line to get the best prices.

 

Keeping these changing dynamics in mind, in 2019 Cebr expects the under 30s’ and 30 to 49 year olds’ real pay to rise by 1.8% and 2.8%, respectively while those over 50 are set for a decline of 1.0%.[3] This is in sharp contrast to the 2006 to 2017 period, when the over 50s enjoyed the highest rise in real pay.

Annual rate of inflation, by age group

Source: ONS, Cebr analysis. Consumption basket is based on six categories: food and non-alcoholic beverages, clothing and footwear, transport, leisure (i.e. recreation and culture), rent and mortgage interest payments.

1 In order to establish an age-based measure of inflation, Cebr used selected expenditure categories from the ONS’ Living Costs and Food Survey along with itemised price indices. The six categories considered are food and fnon-alcoholic beverages, clothing and footwear, transport, leisure (i.e. recreation and culture), rent and mortgage interest payments. These categories cover the majority of expenditure across all age groups. In addition to constructing a six year historic dataset, we have also produced five year forecasts, based on our expectations of price growth and assuming consistent expenditure changes by each age group within each category.

2 Based on ONS’ Experimental Index of Private Housing Rental Prices.

3 The weighted average for the under 30s and 30 to 49 year olds is 2.6%

 

Contact: Nina Skero, Head of Macroeconomics – nskero@cebr.com – 020 7324 2876.