Rejoice! For the first time in four years, average wages have increased by more than inflation. The average wage in the last quarter rose by 1.8%, compared with a 1.7% of CPI inflation. Rejoice, for the hard times are over and the bitter tonic of austerity is working its charms on the body politic. The battle lines of next year’s election are being drawn around a crisis in the cost of living crisis which has seen the price of goods and services rise much faster than wages. And with 13 million people living in poverty – the majority of them in work – George Osborne is keen to trumpet any victory as loudly as possible: “These latest inflation numbers are welcome news for families. Lower inflation and rising job numbers show our long-term plan is working, and bringing greater economic security.” Despite this gleeful optimism on the part of the Government, the numbers belie a rather bleaker picture for those struggling to make ends meet.
1. Bonuses are muddying the water.
The purported figure of 1.7% includes bonuses paid on top of regular salaries – the kind usually enjoyed by those already on high incomes. 40% of bonuses go to only 4% of the population, and you can bet the last pennies you have to rub together that those aren’t the low-salaried and unemployed people bearing the brunt of the cost of living crisis. All in all, if you factor out bonuses, average wage increases trail behind inflation at just 1.4%, and the minimum wage remains stagnant.
2. Public sector workers are being particularly duped.
The headline figure glosses over pay discrepancies between public and private sector workers. Public sector earnings increased by just 0.9%; a real-terms pay cut. Private sector incomes averaged a rise of 2%, a figure that only manages to outstrip inflation due to the upward drag of exclusive bonus payments.
3. The old CPI-RPI switcheroo.
The 1.7% inflation is derived from the Consumer Price Index. This measure doesn’t include housing costs such as mortgage repayments and council tax. If you want to draw conclusions about the cost of living in the UK, it seems like a bit of an oversight to base your conclusion on an index that leaves out the housing costs that are swallowing up an ever-increasing percentage of people’s income. The Retail Price Index, which includes these housing costs, stands at 2.5%. It’s a fall in inflation, but a fall that still leaves the majority of people out of pocket.
4. Neither index is a fair barometer of the real cost of living.
The CPI measures all kinds of commodities. It tracks the price of cinema tickets and kitchen sinks, chocolate milk and car insurance and water pistols. The easily-obscured reality in all this is that the cost of the most basic necessities that many people struggle to afford are rising at a higher rate than either the CPI or RPI would suggest. Energy prices have increased by a third in the last three years, and continue to rise far above inflation, whilst rents in the densely-populated South East rose by 4.7% last year.
5. We are still well within the shadow of 2008.
Crucially, the recent decreases in inflation don’t magically undo the previous six years in which the average income suffered a 10% real-terms cut; the biggest fall since the crash of the 1920s. Since 2008, average prices have risen by 16.9%, nearly double the rate of wage rises. Even Ed Balls has taken time out of attempting to Google his own name to point out the skull-rattlingly obvious fact that households are on average substantively worse off in 2014 than they were in 2010 – to the tune of around £1600.
6. Populist tax reforms aren’t plugging the financial drain.
The Government claims that tax reforms, such as the raising of the personal tax allowance to £10,500, allow households to recoup these losses. But, as critics pointed out at the last budget, these changes are unlikely to compensate for the rise in household bills. A couple on a joint income of £38k can expect to save around £270 off their tax bill. According to consumer group Which?, household energy bills alone could rise by more than £600 a year within six years. Ouch. If the rising cost of bills weren’t enough to quickly chew through any putative increase in take-home pay, people are forced to conjure up money to plug the shortfall caused by real-terms cuts to in-work benefits such as child support, housing benefit and working tax credit . The majority of the 13 million people classed as living in poverty are those in work.
7. The cost of living is forcing many into destitution.
Discourse around the cost of living has largely focused on those in waged work; more optimistic economic forecasts tend to gloss lightly over the impact of inflation on the millions of unemployed people. But if our conversations about the cost of living erase the experiences of the most emiserated, they will quickly unravel into irrelevance. With rises in welfare payments capped at 1%, those trying to scrape by on the notoriously meagre Personal Independence Payment or Job Seekers Allowance are afforded scant protection against inflated costs of living. That’s before you factor in the toll of the bedroom tax, or the benefit payments that are delayed, sanctioned or withdrawn to meet local government targets. As costs of living outstrip income for the poorest in society, it is little wonder that food bank usage, homelessness and destitution are on the rise. Perhaps before we jubilate about the cost of living, we should remember the ten thousand disabled people who died within six weeks of having their benefits withdrawn after being declared ‘fit to work’.
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Published 18th April 2014
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