Sunday, 18 October 2009

One person's inflation is another's deflation

There has always been a debate about the true level of inflation. Like the ruling ideas of each age, the ruling definition of inflation has always been that which best suits those in power: whether employers around a negotiating table or the Government setting benefit rises in Whitehall.

Inflation is calculated by assessing changes in the price of a ‘basket of consumer goods’ weighted proportionately to average spending patterns. The two most common measures, the Consumer Price Index (CPI) and the Retail Price Index (RPI) use slightly different ‘baskets’ to tell us the rate of inflation.

Inflation affects working class people in a variety of ways, as it directly or indirectly informs decisions on pay, benefits, pensions, student loan interest, council tax, etc.

However, 'inflation' is not a neutral term in a society where there are wide disparities in income and therefore spending patterns. The reality is that inflation affects people very differently in the UK, due to the high – and growing – levels of inequality.

The Office for National Statistics’ (ONS) Family Spending survey shows that the poorest 10% of households spend an average of £187.40 per week, compared with £1720.10 per week in the richest 10%. Therefore the richest spend in a week what it takes the poorest over two months to spend.

In this context, is a single inflation rate relevant? Different income groups will inevitably spend their incomes on different items, and individual items within the ‘basket of goods’ will contribute differently to the rate of inflation. LEAP was commissioned by the Trade Union Co-ordinating Group (TUCG) to specifically look at how inflation affects different income groups.

A good example of the disparity of spending patterns is on housing. The typical decile 1 (poorest) household spends 9.66% of total expenditure on rent payments, which for decile 10 (richest) drops to 0.86%. However, mortgage costs are respectively 3.47% and 9.34% - as, typically, the poorest rent and the richest buy their properties.

Other 'basic' living costs: bills (council tax, water, electricity, gas, communications), food and drink, clothing, and transport – were also calculated. These items form an underlying expenditure that is uniform across households since the goods are indispensible or mandatory – items that it is hard, if not impossible, for people to ‘do without’ or cut back on, even in times of recession.

Expenditure on the 'essentials' accounts for over two-thirds of the spend of the poorest households, but less than one-third of the wealthiest.

In reporting our findings, we have defined a new inflation measure called ‘Essential Inflation’ based on the changes in these essential goods that households.

With the exception of clothing and food and drink, these ‘essentials’ are all areas where the Government either sets or regulates costs. There is therefore a responsibility for Government to ensure that inflation does not disproportionately affect the poorest households.

In the year to February 2009, the ONS calculated the CPI measure of inflation to be 3.2%, and the RPI measure 0.0%. In the year to February 2009, ‘Essential Inflation’ was -0.82%. However, if we look at the ‘Essential Inflation’ rate broken down by decile, it was 1.92% for the poorest households and -3.21% for the richest.

In terms of ‘Essential Inflation’, the past year has seen a rise in the cost of living for the poorest households, yet a fall in the cost of living for the richest households. The data clearly shows that inflation is a class issue. In current pay negotiations, where pay freezes are being proposed across organisations, we should understand that a pay freeze is a real terms cut of nearly 2% in living standards for the poor, but a real terms increase for the richest.

The full LEAP Inflation Report: Why Inflation is a class issue is available as a free download. For a hard copy, please send a cheque for £2.50 payable to ‘Another World is Possible’ to LEAP, PO Box 2378, London, E5 9QU.

(a version of this article will appear in the November issue of Labour Briefing)

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