Official inflation figures, published last week, show the rate of price increases is continuing to fall. But the official figures mask the real impact of rising prices. With inequality reaching fresh highs, the anti-poor bias of the official figures means the real slide in people’s standard of living is being disguised. NEF’s new Real Britain Index, also published last week, aims to get behind the official data and show the real impact of inflation. It’ll be updated every month as a counterpoint to the headline numbers. This article explains briefly how it all works.
1. Inequality isn’t being considered as a factor…
The official measure of inflation doesn’t take account of inequality. Inequality matters, because people earning different amounts of money spend it on different things.
2. …even though it has huge implications for people’s spending.
This isn’t just caviar vs. baked beans. The poorer you are, the more – proportionately – you will spend of your income on essentials. There’s a certain minimum amount you need to spend to get by – including housing costs, gas and electricity, water, and food. The poorer you are, the less choice you have with your cash.
3. Different ways of spending aren’t taken into account…
The official inflation measure, the Consumer Price Index (CPI), doesn’t account for the ways in which people on different incomes spend their money in different ways – and it also excludes housing costs. CPI is just an average – it looks across the entire population, and tries to summarise how the ‘typical’ person would be hit by price changes.
4. …which skews the figures.
When the prices of essentials are rising rapidly, this average will understate the true cost of inflation. This is exactly what has happened over the last few years. Since 2006, food prices have risen 40%, water is up 43%, and gas and electricity prices are up 73%. The CPI records prices as only rising 27%, however.
5. Taking the ‘typical’ person is no good – we need to break things down to get a clearer picture…
By sorting the whole population from richest to poorest, and then dividing up into 10% groups, we can get a better idea about how the rate of inflation varies with different incomes, based on what each group spends their money on. The graph below shows our new Real Britain Index (RBI) measure of price increases for each group since 2006.
6. …so we can see what the official figures are hiding.
The bias against the poorest can be clearly seen here. (The slight increase in inflation for the top ten percent seems to be the result of rapid increases in school tuition fees…) So the poorest have lost out more from inflation than the official figure shows.
7. Since 2010 thinks have taken a turn for the worse…
Putting this together with the government’s own survey of household incomes produces some shocking results. ‘Real’ income refers to the income people have after price rises have been taken account of. And whilst real incomes held up pretty well in the immediate aftermath of the crash, from 2008-10, since 2010 serious inequalities have started to reassert themselves.
8. …with real incomes of the poor PLUMMETING…
In the last year for which we have data, the real incomes of the poorest 10% in society fell by nearly 15% in a single year. For the richest 10%, real incomes rose by 3.2%. This shocking decline in living standards for the poorest appears to be the result of falling welfare payments – a direct result, it seems, of government policy.
9. …and the rich/poor gap expanding…
And of course this rise for the richest 10% means inequality is rising sharply. This almost certainly understates the real impact. We don’t have regular, official data for the top 1% (earning more than £150,000) or top 0.1% (earning more than £1m). But it seems highly likely that those at the very top of the income scale are doing even better than the official figures show.
10. …pressing the need for wage increases.
Inequality is rising, and rising rapidly. Even at low rates of CPI inflation, the bias of price rises means the poorest will be losing out still more. Price controls on essentials can help. But more fundamentally we need to strengthen labour market protections, pushing wage increases ahead of price increases for the majority. This will mean rebuilding trade unions, particularly in the private sector, and raising the minimum wage.