The period of ultra-low inflation is over. CPI inflation is expected to rise above 2 per cent in the near future, eating into earnings and making benefits less generous. This coincides with a change in the way we measure those price rises, with a new main measure of inflation. On 21 March, CPIH will replace CPI.
This is welcome, if not without controversy, because CPIH includes a measure of owner occupiers’ housing costs and council tax, which are important costs for many households. While the change will not necessarily have a large effect on the headline rate in the immediate future – since 1989 the average difference between CPI and CPIH has been 0 percentage points – the inflation measure one uses matters, particularly for understanding long-term trends. Deflating household income using RPIJ (the National Statistic that was produced to make up for the fact that both RPI and CPIH were discredited) would suggest that incomes had risen by 17 per cent since 1999, whereas using the newly reformed CPIH the growth is 26 per cent.
Yet the nature of any headline or main measure of inflation is that it will mask differences across people and households. Different households and groups experience different inflation rates. Although in many cases these differences are small they can be consistent and therefore make a big difference over time. For example, since the millennium lower income households have consistently faced higher rates of inflation than higher income households have. Had those in the bottom half of experienced the inflation rate of households towards the top of the income distribution in the period since 2001, they would have an additional £150 of spending power today.