Tuesday, 16 March 2010

Whose inflation?

When LEAP published its 2009 Inflation report, we demonstrated that inflation was at different levels for those on different incomes - with the poor suffering higher levels of inflation than the better off. This led to us proposing a new inflation measure: Essentials Inflation. We also called on the Government to act to ensure that the inflation on essential goods was reduced so as not to disproportionately impact on the poorest.

Essential Inflation ranged from -3% (i.e. 3% deflation) for the wealthiest 10%, to +2% for the poorest decile. It was the housing market that accounted for much of this differential with mortgage rates being cut (benefiting the wealthiest disproportionately) and rental costs rising (hitting the poorest disproportionately).

Today, the ONS has announced that it is recalculating how it assesses mortgage inflation. Today's Financial Times reports that this will make the new Retail Price Index (RPI) inflation measure "more representative of available mortgages".

This is important as RPI is used in setting much of public sector pay and the basic state pension. It is the more relevant for personal costs since it includes housing costs, unlike CPI.

However, what is less trumpeted is that recalculating last year's inflation figures on this new RPI measure shows that instead of 1.2% deflation last year, it was 0.2%, and we only had four months of deflation. So the pay freezes many suffered were even less justified than we thought.

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