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

Photo: Getty
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How a small tax rise exposed the SNP's anti-austerity talk for just that

The SNP refuse to use their extra powers to lessen austerity, says Kezia Dugdale.

"We will demand an alternative to slash and burn austerity."

With those few words, Nicola Sturgeon sought to reassure the people of England, Wales and Northern Ireland last year that the SNP were a party opposed to public spending cuts. We all remember the general election TV debates, where the First Minister built her celebrity as the leader of the anti-austerity cause.

Last week, though, she was found out. When faced with the choice between using the powers of the Scottish Parliament to invest in the future or imposing cuts to our schools, Nicola Sturgeon chose cuts. Incredible as it sounds the SNP stood shoulder to shoulder with the Tories to vote for hundreds of millions of pounds worth of cuts to schools and other vital public services, rather than asking people to pay a little bit more to invest. That's not the choice of an anti-austerity pin-up. It's a sell-out.

People living outside of Scotland may not be fully aware of the significant shift that has taken place in politics north of the border in the last week. The days of grievance and blaming someone else for decisions made in Scotland appear to be coming to an end.

The SNP's budget is currently making its way through the Scottish Parliament. It will impose hundreds of millions of pounds of cuts to local public services - including our schools. We don't know what cuts the SNP are planning for future years because they are only presenting a one year budget to get them through the election, but we know from the experts that the biggest cuts are likely to come in 2017/18 and 2018/19. For unprotected budgets like education that could mean cuts of 16 per cent.

It doesn't have to be this way, though. The Scottish Parliament has the power to stop these cuts, if only we have the political will to act. Last week I did just that.

I set out a plan, using the new powers we have today, to set a Scottish rate of income tax 1p higher than that set by George Osborne. This would raise an extra half a billion pounds, giving us the chance to stop the cuts to education and other services. Labour would protect education funding in real terms over the next five years in Scotland. Faced with the choice of asking people to pay a little bit more to invest or carrying on with the SNP's cuts, the choice was pretty simple for me - I won't support cuts to our nation’s future prosperity.

Being told by commentators across the political spectrum that my plan is bold should normally set alarm bells ringing. Bold is usually code for saying something unpopular. In reality, it's pretty simple - how can I say I am against cuts but refuse to use the powers we have to stop them?

Experts - including Professors David Bell and David Eiser of the University of Stirling; the Resolution Foundation; and IPPR Scotland - have said our plan is fair because the wealthiest few would pay the most. Trade unions have backed our proposal, because they recognise the damage hundreds of millions of pounds of cuts will do to our schools and the jobs it will cost.

Council leaders have said our plan to pay £100 cashback to low income taxpayers - including pensioners - to ensure they benefit from this plan is workable.

The silliest of all the SNP's objections is that they won't back our plan because the poorest shouldn't have to pay the price of Tory austerity. The idea that imposing hundreds of millions of pounds of spending cuts on our schools and public services won't make the poorest pay is risible. It's not just the poorest who will lose out from cuts to education. Every single family and business in Scotland would benefit from having a world class education system that gives our young the skills they need to make their way in the world.

The next time we hear Nicola Sturgeon talk up her anti-austerity credentials, people should remember how she did nothing when she had the chance to end austerity. Until now it may have been acceptable to say you are opposed to spending cuts but doing nothing to stop them. Those days are rapidly coming to a close. It makes for the most important, and most interesting, election we’ve had in Scotland.

Kezia Dugdale is leader of Scottish Labour.