Inflation: It's worse than it seems

Low wage growth + High price growth = Misery.

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

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