As we await the release of the worst unemployment figures for 17 years, the Institute for Fiscal Studies found families are set to face the biggest income drop since the 1970s.
It reports that middle-income families are suffering an "unprecedented collapse" in living standards as the crushing combination of inflation and low wages wipe thousands off incomes.
The IFS warned that the next two years will be "dominated by a large decline" in incomes. Figures shows a typical couple with two children is likely to be £2,080 worse off in 2013 terms than they were last year, as real income falls from £30,056 to £27,976.
It revealed median incomes are set to fall by 7% when inflation is taken into account – the sharpest drop in 35 years. The study said: "The unprecedented collapse in living standards is chiefly due to the high inflation and weak earnings growth over this period."
Robert Joyce, of the IFS, described it as the "delayed effect" of the recession. He said: "Real earnings didn't fall for a while after the economy started contracting, partly because inflation was very low. But inflation has risen sharply and earnings have not done so in response."
The depressing findings come as another think-tank warned that UK recovery will be the weakest "since the end of the First World War."
The National Institute of Economic and Social Research said despite its monthly report showing a slight improvement, with GDP rising by 0.5% in the three months to September, compared to 0.4% in the three months to August – there is still a long way to go.
The NIESR said the level of GDP is still 4% below the pre-recession peak – suggesting the recovery is the weakest since 1918. It added: "UK economic growth over the past year has been anaemic."
It is reported that economists predicted stronger growth for the period to September due to the weak second quarter being blamed on special factors, such as the Royal Wedding bank holiday.
Pushed into poverty
The IFS report also forecast that 600,000 more children will be pushed into poverty by 2013, taking the total living in 'absolute' poverty to 3.1million. It says the tax and benefit reforms introduced by the coalition will drive down real incomes, and the new Universal Credit system will fail to provide for the losses of the poor.
The official employment figures to be published today are expected to reveal the true extent of the unemployment crisis, with economists fearing the number for youth unemployment alone will reach an all-time record of one million.
Total unemployment is expected to top the 2,521,000 recorded in 1994.