A nation divided by the recession

Young, affluent households prosper at the expense of pensioners

The worst recession in three-quarters of a century is threatening to divide Britain more painfully than ever. Younger, richer households are gaining from lower inflation, house prices and mortgage rates, but at the expense of older, poorer fellow citizens. They are struggling to survive as they suffer relatively high price rises and a drop in their incomes as interest rates on savings hit zero and they see the equity in their homes destroyed by the property slump.

The spectre of a "two-nation Britain" – a subject talked of by Benjamin Disraeli in Victorian times – is conjured up again by the respected Institute for Fiscal Studies, which points out that older and poorer households are facing much higher average inflation rates than younger and richer ones, because the former have tended to suffer most from continued high annual inflation in food and domestic energy costs, while the latter have tended to benefit most from cuts in mortgage rates and falling petrol bills. Richer households, and in particular those with mortgages, now have very low inflation rates, on average below zero, says the IFS. But the poorest pensioner households, usually with no mortgage, are still coping with inflation at 6.9 per cent.

Thanks to cuts in the bank rate, mortgage interest inflation fell from 2.9 per cent in September to minus 34.7 per cent in January. A homebuyer with a £200,000 mortgage and an interest rate tracking the Bank of England's Bank Rate – now down to 0.5 per cent – will have enjoyed a £500 per month boost, the equivalent of a pre-tax pay rise of nearly £10,000.

The fall in petrol and diesel prices has also disproportionately favoured the Porsche-driving classes. But for those renting, things are not so jolly: inflation is 4.7 per cent for private renters, 4.9 per cent for those who own outright and 6.1 per cent for local authority renters, usually lower-income households that spend more of their budget on food and fuel.

The IFS analysis reveals that in January 2009 the richest fifth of households had an average inflation rate of minus 1 per cent; the poorest fifth had an average inflation rate of 5.3 per cent.

High-spending households have struck a small bonanza from the fall in mortgage rates and the reduction in petrol prices. If they are looking for a property and have a large cash deposit they can also take advantage of the 15 per cent slump in property prices, a £22,000 bonus, given the price of the average property. For those looking for a new car, many manufacturers are falling over themselves to offer discounts, cash-backs and other savings.

There is also a long-term division growing between the public and private sectors: those who keep a job will fare best, but the chances of doing so are much higher in the state sector, the only area of the economy still expanding.

But pensioners are coming off relatively worst. In January 2009, RPI food inflation was 9.9 per cent, a little below the 11.2 per cent rate for food last September, while household fuel inflation was 35.1 per cent in January, down slightly from 39.6 per cent in September. Both items are a big part of pensioners' budgets.

So, even though average inflation is very low – 0.1 per cent on the RPI measure which includes mortgage interest, and CPI down to 3 per cent with negative rates to come over the summer – householders aged 70 to 79 have inflation rates of 5.6 per cent on average and those aged 80+ have an inflation rate of 7.1 per cent on average.

The economic, social and political consequences of this most divisive of downturns promise to be more dramatic than any seen since the 1930s.