The Institute for Fiscal Studies – a leading independent economic research institute based in London – has suggested that the purchasing power of British households has reached its lowest ebb since 1981.

The think-tank analysed household income data from 2009-10, and found that whilst median incomes had continued to grow in that period (albeit at a fairly lethargic rate of 1.6%), it is “entirely possible” that they fell by 3% in 2010-11. At the same time, inflation has risen considerably to its current rate of 5.3%.

Data for the first 11 months of 2010-11 is already available, and shows a 3.8% reduction in earnings. The IFS predicts that median incomes fell by 3% overall, and warns that if a similar drop occurs for 2011-12, this would add up to the worst reduction in median incomes for 30 years.

If that doesn’t sound severe enough, Mervyn King (Governor of the Bank of England) has said that the drop in purchasing power is the worst since the 1920s, and economist Roger Bootle has said we are facing the worst squeeze since the 1870s.

The short-term outlook definitely seems pretty bleak, but incomes, in real terms, are due to begin increasing again by the end of 2012, and forecasts suggest they will be back up to their 2009 peak by 2015.  Nevertheless, managing your finances responsibly and getting the best possible value for money is going to be more important than ever for the time being.