New analysis shows that the rising cost of essentials had already wiped out most of the gains in living standards made in the early 2000s by families on low and modest incomes, even before the recession began, with increases in the price of food, fuel and other basics greatly outstripping general inflation in recent years.
- There is little reason to believe that disposable incomes will perform well, even against standard, average measures of inflation. Our findings on the impact of a new, more malign inflation environment add an additional challenge. They mean that the task of preventing low to middle income households from falling behind now faces even stronger headwinds. With the cost of an essential basket of goods now rising significantly faster than general inflation, more and more low to middle income households will not just fall behind those above them, but also behind what is widely considered to be a minimum acceptable standard of living.
- For those who can currently afford this basket of goods, their breathing space will get increasingly restricted. For the surprising numbers of households who are already below this standard, more and more basic goods will have to be foregone. Before the 2008/09 recession, this new inflation environment had already wiped out all the gains in living standards that lower income households had achieved in the early 2000s. If they continue, living standards will be appreciably lower come 2020.
- When it comes to policy – especially in the context of severe fiscal constraints – the new importance of inflation for social outcomes should cause the Government to look for every feasible way of keeping the price of essential goods and services down. Of course, in reality very significant parts of this picture are beyond the control of UK policymakers. Global price pressures on commodities, for example, will not yield to policy decisions in the UK. This makes it all the more important that everything possible is done in the few areas in which we do have purchase. What aspects of government policy become more important in this environment?
- For one, it is important that we are not naïve to the impact on living standards of reduced public subsidies for key goods and services where these reductions feed through into higher prices for consumers. This shift from public to private expenditure has been a key dynamic of the past 30 years and its full implications for living standards have been obscured by a general tendency to focus only on headline rates of inflation. To take one example, in the case of public transport, far more priority could be given to maximising the use of public subsidies and franchising agreements to control costs for low to middle income consumers, in particular for those reliant on public transport for work.
- Other areas of public policy may also deserve a higher priority. Efforts to exert downward pressure on energy prices, whether through increased competition or the greater use of redistributive mechanisms like social tariffs, are one. Another may be the reform of Council Tax to reduce pressures on low income households, a group that have suffered from above inflation increases in Council Tax at the bottom coupled with the failure of rates to keep track with rising property prices at the top.
- Ultimately, the only sure way for a government to preserve the living standards of those relying on payments from the state and facing high inflation rates is to ensure that these payments rise in line with people’s real living costs. This would mean using an uprating index that reflects these costs much more fairly than the Consumer Prices Index. In the short term, fiscal austerity would make such a change extremely difficult. At the very least, the Government should be acutely aware of the increased importance of inflation in influencing inequalities. Prices are today a more salient issue for social policy than they have been for many years.