Inflation is worst for the worse off

"Essentials" increased in price by far more than the CPI last year.

Money broker Tullett Prebon has created an index of price inflation in "essentials" in Britain, which it's calling (unsurprisingly) the Tullett Prebon UK Essentials Index. It defines "essential" goods as:

  • Food, alcohol and tobacco
  • Council tax, water charges and home insurance
  • The costs of domestic heating and power, principally gas and electricity
  • Fuel, road tax and vehicle insurance
  • Train, bus and other public transport fares

(Yes, alcohol and tobacco are essentials.) Between them, those components make up 40 per cent of the RPI, with the other sixty per cent being non-essentials.

Defining the difference lets us take a look at how bad inflation is hitting just the act of day-to-day living. Tullett Prebon estimates inflation in essentials was 3.7 per cent over 2012, well above the CPI, which increased by 2.8 per cent. And, since wages have been rising below even CPI, the price of essentials has soared in comparison to income:

Between 2007 and 2012, nominal incomes expanded by 10% whilst the cost of essentials soared by more than 33%, meaning that the average working person would have been 17% worse off if he or she had spent the whole of their income on essentials.

Of course, few people do spend their entire income on essentials. However, with real incomes under pressure, and with the prices of essentials now increasing at annual rates of close to 4%, the proportion of household incomes going into essentials is clearly rising, and is set to continue to do so.

As the chart below makes clear, this is entirely a post-recession phenomenon:

It's been known that inflation is worse for the worse off for quite some time now, but it's largely been a fact bandied around by the far left. The Communist Party of Britain — that's the one which publishes the Morning Star — produced a Working Class Price Index in 2010, which made much the same point. That pegged inflation for the working class (which included a broad mixture of non-essentials as well) at over 10 per cent for some years.

This isn't quite the same point as the one made by those at the intersection of compassionate conservatism and inflation hawkishness, which is that high inflation disproportionately hits the poor. That may or may not be true — I'm inclined to think it does, but not as much as high unemployment and low growth does, and insofar as inflation hawks call for that trade-off they're being disingenuous — but what is true is that whatever the headline rate of inflation is, if you're poor, life is getting more expensive much faster than that indicates.

One final point (I think made originally by Left Outside) is that a closer look at the categories which count as essentials reveals a far greater extent of government control over prices than is normal. Council tax, road tax and almost all public transport fares are set (in aggregate) by the government; a massive proportion of the cost of alcohol, tobacco, fuel and heating and power is similarly driven by taxation.

As a result, standard understanding of inflation goes out the window. There is no intrinsic link between monetary policy and the rate of inflation for "essentials", because the prices aren't set by the market. It's a rare situation where the government could have its cake and eat it; it could implement expansionary monetary policy to boost demand, while at the same time capping, temporarily, rises in those direct regressive taxes and fares to below inflation.

But for that to happen, there first needs to be wider understanding of the problem. That's why the essentials index is an important piece of research, and worth keeping an eye on.

Updated to replace the giant picture of some rice with the chart which was actually supposed to be there.

Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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Why the Liberal Democrats by-election surge is not all it seems

The Lib Dems chalked up impressive results in Stoke and Copeland. But just how much of a fight back is it?

By the now conventional post-Brexit logic, Stoke and Copeland ought to have been uniquely inhospitable for the Lib Dems. 

The party lost its deposit in both seats in 2015, and has no representation on either council. So too were the referendum odds stacked against it: in Stoke, the so-called Brexit capital of Britain, 70 per cent of voters backed Leave last June, as did 62 per cent in Copeland. And, as Stephen has written before, the Lib Dems’ mini-revival has so far been most pronounced in affluent, Conservative-leaning areas which swung for remain. 

So what explains the modest – but impressive – surges in their vote share in yesterday’s contests? In Stoke, where they finished fifth in 2015, the party won 9.8 per cent of the vote, up 5.7 percentage points. They also more than doubled their vote share in Copeland, where they beat Ukip for third with 7.3 per cent share of the vote.

The Brexit explanation is a tempting and not entirely invalid one. Each seat’s not insignificant pro-EU minority was more or less ignored by most of the national media, for whom the existence of remainers in what we’re now obliged to call “left-behind Britain” is often a nuance too far. With the Prime Minister Theresa May pushing for a hard Brexit and Labour leader Jeremy Corbyn waving it through, Lib Dem leader Tim Farron has made the pro-EU narrative his own. As was the case for Charles Kennedy in the Iraq War years, this confers upon the Lib Dems a status and platform they were denied as the junior partners in coalition. 

While their stance on Europe is slowly but surely helping the Lib Dems rebuild their pre-2015 demographic core - students, graduates and middle-class professionals employed in the public sector – last night’s results, particularly in Stoke, also give them reason for mild disappointment. 

In Stoke, campaign staffers privately predicted they might manage to beat Ukip for second or third place. The party ran a full campaign for the first time in several years, and canvassing returns suggested significant numbers of Labour voters, mainly public sector workers disenchanted with Corbyn’s stance on Europe, were set to vote Lib Dem. Nor were they intimidated by the Brexit factor: recent council by-elections in Sunderland and Rotheram, which both voted decisively to leave, saw the Lib Dems win seats for the first time on massive swings. 

So it could well be argued that their candidate, local cardiologist Zulfiqar Ali, ought to have done better. Staffordshire University’s campus, which Tim Farron visited as part of a voter registration drive, falls within the seat’s boundaries. Ali, unlike his Labour competitor Gareth Snell and Ukip leader Paul Nuttall, didn’t have his campaign derailed or disrupted by negative media attention. Unlike the Tory candidate Jack Brereton, he had the benefit of being older than 25. And, like 15 per cent of the electorate, he is of Kashmiri origin.  

In public and in private, Lib Dems say the fact that Stoke was a two-horse race between Labour and Ukip ultimately worked to their disadvantage. The prospect of Nuttall as their MP may well have been enough to convince a good number of the Labour waverers mentioned earlier to back Snell. 

With his party hovering at around 10 per cent in national polls, last night’s results give Farron cause for optimism – especially after their near-wipeout in 2015. But it’s easy to forget the bigger picture in all of this. The party have chalked up a string of impressive parliamentary by-election results – second in Witney, a spectacular win in Richmond Park, third in Sleaford and Copeland, and a strong fourth in Stoke. 

However, most of these results represent a reversion to, or indeed an underperformance compared to, the party’s pre-2015 norm. With the notable exception of Richmond’s Sarah Olney, who only joined the Lib Dems after the last general election, these candidates haven’t - or the Lib Dem vote - come from nowhere. Zulfiqar Ali previously sat on the council in Stoke and had fought the seat before, and Witney’s Liz Leffman and Sleaford’s Ross Pepper are both popular local councillors. And for all the excited commentary about Richmond, it was, of course, held by the Lib Dems for 13 years before Zac Goldsmith won it for the Tories in 2010. 

The EU referendum may have given the Lib Dems a new lease of life, but, as their #LibDemFightback trope suggests, they’re best understood as a revanchist, and not insurgent, force. Much has been said about Brexit realigning our politics, but, for now at least, the party’s new normal is looking quite a lot like the old one.