Inflation: It's worse than it seems

Low wage growth + High price growth = Misery.

Inflation around the government's target of 2 per cent - or even up at 3-4 per cent as it has been recently - does not sound too bad but people are complaining about making ends meet. Part of that is the squeeze on incomes which are rising more slowly than prices. Yet lurking behind the innocuous-sounding headline rates of change for inflation, and smooth words of reassurance from the Bank of England, is a harsher reality. Several items have more than doubled in price since the Bank was made responsible for inflation and interest rates in 1997, despite the headline measure only increasing by one-third in that period and the annual rate averaging barely 2 per cent.

Overlay from Timetric

In the early 2000s, earnings were rising faster than inflation but the pattern changed in 2007. Earnings growth has slowed dramatically while the rate of price increases has risen. Indeed, from the start of 2008, prices have risen by 15 per cent while average earnings have increased by only 5 per cent. It's no wonder that people are feeling the squeeze. The squeeze probably feels worse as we tend to notice the items which are rising in price strongly! The chart below shows all the top level components of the index - and a considerable variation in the rates of inflation among the different goods and services. Some components have fallen since 1997 - prices are actually lower than 15 years ago - while others have risen by much more than the average. By far the largest riser has been education - a combination of university fees (which rose in 2006), private school and nursery fees, and evening classes.

Overlay from Timetric

The story is more striking at the next level of disaggregation. Since 1997 (our charts have set May 1997=100), transport insurance has more than tripled in price and fuels (we show gas) have more than doubled. But more surprising are the price rises of some run-of-the-mill items such as postal services (up 94 per cent since 1997), petrol (+134 per cent), cigarettes (+137 per cent) and train/air tickets (+113 per cent). As if to prove the point that basics have been hit hard, chocolate, the jam on your bread, and fish and chips are among the largest risers in the food category and have risen by more than double the aggregate rate of inflation (up 36 per cent as measured by the CPI).

UK CPI: High Rising Components 1997-2012 from Timetric

Too sanguine? Bank of England chief Mervyn King (photo: Getty Images)

Lauren Buljubasic is an analyst at Timetric, provider of economic data visualisation and analysis

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Is anyone prepared to solve the NHS funding crisis?

As long as the political taboo on raising taxes endures, the service will be in financial peril. 

It has long been clear that the NHS is in financial ill-health. But today's figures, conveniently delayed until after the Conservative conference, are still stunningly bad. The service ran a deficit of £930m between April and June (greater than the £820m recorded for the whole of the 2014/15 financial year) and is on course for a shortfall of at least £2bn this year - its worst position for a generation. 

Though often described as having been shielded from austerity, owing to its ring-fenced budget, the NHS is enduring the toughest spending settlement in its history. Since 1950, health spending has grown at an average annual rate of 4 per cent, but over the last parliament it rose by just 0.5 per cent. An ageing population, rising treatment costs and the social care crisis all mean that the NHS has to run merely to stand still. The Tories have pledged to provide £10bn more for the service but this still leaves £20bn of efficiency savings required. 

Speculation is now turning to whether George Osborne will provide an emergency injection of funds in the Autumn Statement on 25 November. But the long-term question is whether anyone is prepared to offer a sustainable solution to the crisis. Health experts argue that only a rise in general taxation (income tax, VAT, national insurance), patient charges or a hypothecated "health tax" will secure the future of a universal, high-quality service. But the political taboo against increasing taxes on all but the richest means no politician has ventured into this territory. Shadow health secretary Heidi Alexander has today called for the government to "find money urgently to get through the coming winter months". But the bigger question is whether, under Jeremy Corbyn, Labour is prepared to go beyond sticking-plaster solutions. 

George Eaton is political editor of the New Statesman.