Britain's poorest have seen a "staggering" 15% decline in their incomes in the past year, according to a stark report, which shows official figures charting the level of inflation have under-estimated the drop in living standards.
The New Economics Foundation (NEF) said that the richest 10% in British society have, by contrast, enjoyed "steady growth" in their earnings once more.
This comes as a separate study found that the average British worker is almost £5,000 a year worse off because wages have failed to keep pace with inflation since 2008.
The NEF think-tank dismissed the official Consumer Prices Index for inflation, which gives a sense of the cost of living, as "fundamentally flawed" as there is no such thing as an 'average household'. It also launched the so-called Real Britain Index to provide a more accurate measure of price rises.
The suggestion that the official figures are giving a rosy picture of how the poorest Britons are coping will jar with the coalition's message, as George Osborne seized on the recent five-year inflation low of 1.2% as a "dose of good news" and proof that his economic strategy was working.
The Chancellor's positive interpretation ignored the fact that inflation is still rising faster than Britons' wages, which according to the latest official figures out today rose by just 0.7%, indicating a continued fall in real terms.
David Cameron has also tried to argue that there have been "good signs" about Britons' wages, citing figures that suggested that only the top 10% of earners fell behind the CPI rate of inflation. with an average increase of 2%.
He has also dismissed suggestions that the coalition's cuts were hurting the poor, saying: "This is a coalition government which will help those who can't help themselves."
However, the NEF's study concluded that poorer households spend more on essential goods and services such as food and utilities, which is overlooked by the CPI because it is based on an average. The cost of food, gas and electricity has increased since 2005, having a huge effect on poorer households, said the foundation.
"[In] the last year for which we have data, 2012/13, the real incomes of top 10% actually increased by 3.9%," the NEF noted. "But those in the very lowest group, the 0-10%, saw their already meagre earnings drop an extraordinary 15% in a single year – driven largely, it would seem, by welfare and benefits changes."
"The UK is rapidly becoming a more unequal country, with the inflation effect exaggerating and speeding up this transformation. It’s also a transformation barely hinted at by official measures of inflation."
James Meadway, senior economist at the New Economics Foundation, said: "It's clear that official measures of inflation are no longer fit for purpose. At a time where the price of essentials - from food to housing - has sky-rocketed, the CPI stats are failing to match up to the reality of sliding living standards for the majority of Britons.
"Our analysis, which highlights the slide in real income for all but the very richest, has troubling implications. Britain is becoming a rapidly more unequal society, with the inflation effect exaggerating this transformation.
"We need concerted action by all parties to strengthen the minimum wage and tackle the rising price of utility and grocery bills."
The Office for National Statistics dismissed suggestions that its inflation figures were inaccurate, with a spokesman telling the Huffington Post UK: "The Consumer Prices Index, far from being "fundamentally flawed", uses 110,000 price quotes a month collected in 20,000 shops across the UK, along with additional price information from the internet, to give an accurate picture of how prices are changing for average consumers.
"However, precisely because we recognise that individuals' experience may not match the average, for years we have provided a Personal Inflation Calculator so that people can see what their own inflation rate is - or indeed for any other household spending pattern."
Meanwhile, the University of Bath Institute for Policy Research found that Britons' wages are almost 20% lower than if pay growth had continued, and recovery is a "long way" behind schedule.
The report's author, Professor Paul Gregg, said: "The recent fall in unemployment is likely to be sufficient to stop real wages falling further by the end of 2014. Continued falls in unemployment will lead to modest wage recovery, but this alone will not go far enough.
"For a sustained wage recovery, the economy needs to generate a return to the levels of productivity growth seen over the 25 years before the crash, but that has been notably absent over the last six years.
"As labour gets scarce and more expensive, we should expect firms to increase investment generating productivity improvements.
"However, even this will not be enough for sustained real wage gains unless the distribution of the returns from productivity growth can be channeled back to ordinary workers."
The ONS says that GDP per capita, which gives a sense of individual wealth, was still 5.1% below its pre-crisis peak by the end of 2012.
The ONS has now factored in spending on drugs and prostitutes into its calculations, estimating that it is worth 0.5% of GDP. "The vast majority of illegal drugs that households consume are assumed to be imported from overseas," it adds. Labour have seized on this, with shadow chief secretary Chris Leslie saying “these accounting changes to the way GDP is measured do not mean families or businesses are better off."
The ONS still say that the recovery has been the slowest since its records begam, with chief economist Joe Grice describing it as "unusually slow". Meanwhile, the National Institute for Economic and Social Research suggest that it has been the slowest recovery in 100 years.
ONS chief economist Joe Grice said: "It remains the case that the UK experienced the deepest recession since ONS records began in 1948"
The ONS states: "The headline story of weak productivity remains, and the latest GDP growth revisions do not offer a solution to the ‘productivity conundrum’." Economic productivity was still 2.5% below its pre-crisis peak in the last quarter of 2012, the statistics body said.
Britons' wages will by next May never have shrunk so far over the course of a single term of parliament in real terms since the Victorian era, according to research by the House of Commons Library. The last time average earnings, accounting for inflation, slid by a greater amount was from 1874-1880, when Benjamin Disraeli was prime minister.
Inflation is still eating at your pay packet, which means you're getting poorer in real terms, and it will take a while before it not just starts to improve, but returns to pre-recession levels. Your pay packet is still continuing to fall by more than in any prior recovery and is down 8% since May 2010, experts warn.
The ONS warned: "The contribution of net trade is unchanged and remains weak." Despite Osborne warning in his Budget that he wants businesses to export more, the Office for Budget Responsibility, the government's forecaster, predicts that the UK's exports will still fail to make a net contribution to the country's growth. It said: "Net trade is expected to make little contribution to growth over the remainder of the forecast period, reflecting the weakness of export market growth and a gradual decline in export market share."
George Osborne's hopes of eliminating Britain's deficit by 2018 look to be increasingly hard as the decline in the country's rate of borrowing appears to have stalled.
Osborne's early actions as chancellor are not viewed much more positively, with the ONS saying: "The early part of the recovery path is broadly unchanged, but stronger growth now prevails through 2011 and 2012."