Inflation figures have under-estimated the decline in living standards, with the poorest Britons seeing a "staggering" 15% decline in their incomes in the past year, according to a report.
Research by the New Economics Foundation said that, in stark contrast, the richest 10% in British society had seen their earnings return to "steady growth".
A so-called Real Britain Index was launched which the think-tank said aimed to provide a more accurate measure of price rises.
The official Consumer Prices Index is "fundamentally flawed" because there is no such thing as an average household, said the report.
Poorer households spend more on essential goods and services such as food and utilities, which is ignored by the CPI because it is based on an average, according to the study.
The cost of food, gas and electricity has increased since 2005, having a huge effect on poorer households, said the foundation.
Earnings have not kept pace with rising prices despite low rates of inflation, so real incomes have fallen, it said.
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."
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.
Wages are almost 20% lower than if pay growth had continued, and recovery is a "long way" behind schedule, said the University of Bath Institute for Policy Research.
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 channelled back to ordinary workers."
A spokesman for the Office for National Statistics said: "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."
A Treasury spokesman said: "We reject this analysis. Under this government, more people have been in work than ever before and inequality is lower than the average under the previous government, proving that the Government's long term economic plan is working.
"The only sustainable way to raise living standards is to keep working through the plan that is building a resilient economy and has enabled us to announce the first real terms increase in the minimum wage since the great recession.
"We appreciate that the effects of the great recession are still being felt, which is why we have taken continued action to help hardworking people by cutting income tax, freezing fuel duty, helping local authorities to freeze council tax, cutting energy bills, providing free school meals, and reducing childcare costs."