New cost of living figures show real effect of recession on pay

Things are actually even worse than they seem.

And things are even worse than they seem

The UK is suffering from the longest sustained decline in living standards since records began – but things are actually even worse than they seem.

New New Economics Foundation (NEF) analysis reveals the government’s preferred measure of inflation – the Consumer Price Index (CPI) – has consistently understated the impact of price increases.

It is calculated according to price changes in the shopping basket of the ‘average’ household. But there is no such thing. We all buy different things, which means the impact of inflation will vary from household to household – and significantly according to how much we earn.

There are some things we all have to buy: food, housing, heating and so on. And the less money you have the higher proportion of it you must devote to these essentials.

So, if their prices rise faster than prices in general, the poorest will be squeezed harder than the average measure of inflation suggests. This is exactly what has happened over the last few years. As the graph below shows, prices of essentials – housing excepted – have shot way ahead of general CPI prices (click to zoom):


By taking account of how people on different incomes spend their money according to Office for National Statistics (ONS) survey data, we can show a different rate of inflation for each income group. The graph below shows the cumulative impact of rising prices for the whole population, grouped in 10 per cent chunks from the poorest to the richest:

Prices 2

Over the last eight years those on the lowest incomes have experienced substantially more inflation than those further up the scale. They have less choice over how they spend their more limited funds, and so more directly suffer the impact of the rising price of essentials (in case you’re wondering, the slight increase for the richest 10 per cent appears to be the result of rapid rises in school tuition fees).

Putting this together with ONS income data, taken after taxes and benefits, we can show the impact on real earnings across the population. The table below shows how incomes have changed for each group over the pre-crash period, the years immediately after the crash, and the period of coalition government to now.

prices 3

There has been a general decline in real incomes – although we note here that the data is not detailed enough to capture what has happened to the top 1 per cent and 0.1 per cent. It is those in the ‘squeezed middle’ who have suffered the worst impact, with those in the 60-70 per cent group earning an average of (pre-tax) £33,712 experiencing a fall in real income by 10.6 per cent since 2006.

Breaking the figures down further reveals some disturbing trends. While real incomes held up comparatively well in the two years following the crash, the years since 2010 have seen a marked turn for the worse.

This downward pressure has not been applied evenly: in the last year for which we have data, 2012/13, the real incomes of top 10 per cent actually increased by 3.9 per cent. Those in our 60-70 per cent band fell 1.8 per cent. But those in the very lowest group, the 0-10 per cent, saw their already meagre earnings drop an extraordinary 15 per cent in a single year – driven largely, it would seem, by welfare and benefits changes.

This analysis has troubling implications. The UK is rapidly becoming a more unequal country, with the inflation effect exaggerating and speeding up this transformation. It’s also a transformation barely hinted at by official measures of inflation.

That’s where our new RBI comes in. While the CPI might fail to accurately reflect the reality of skyrocketing prices and falling incomes, every month we’ll release updated figures that more closely align with the experiences of the majority of UK earners.

As the scale of the problem becomes clear, so does the need for concerted action to boost wages for those on lower incomes and tackle the spiralling cost of food and other essentials.

James Meadway is a senior economist at the New Economics Foundation (NEF)

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