This paper compares consumption and income as measures of households’ living standards using UK data. It presents evidence that income is likely to be under-recorded for households with low resources. It describes the different impressions one gets about trends in the level and inequality of living standards in the UK when using consumption, and when one adds an imputed income from housing, rather than near-cash income. It describes what different impressions one gets about the composition of households with low living standards if these are identified with consumption rather than income.

Much research is concerned with the living standards of households, how equally distributed are these living standards, and whether the level of or the inequality in living standards are becoming more or less unequal over time. When making these assessments, it is common to use the net income of a household as a proxy for its standard or living; indeed, in the UK, there are statutory measures of child poverty against which the government of the day has to report progress annually, all of which define “poverty” in terms of a low household income; similar targets exist at the level of the European Union. An alternative, long-favored by economists, is to use a household’s consumption as a proxy for its standard of living, where “consumption” is defined as a household’s expenditure, plus the benefits it derives from durable goods, including housing. At any point in time, consumption and income will differ because households can borrow or save and will benefit from their stock of accumulated durable goods, but current consumption should be a better guide to a household’s long-term standard of living than current income. Furthermore, some have argued that income in household surveys is under-reported for households with low resources, giving a practical reason to use consumption rather than income. This paper uses data from the UK household budget surveys (the Living Cost and Food Survey and its predecessors) to construct four decades of consistent micro-data on households’ income and consumption. A key step in this is to estimate the consumption flow (or the imputed income) from housing.