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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Leader: Against neverendums

At present, we are experiencing a fetishisation of referendums. But we must remember that Britain is a representative democracy.

Imagine a Britain where the death penalty was restored, where immigration quotas were determined on ethnicity and where some communities were forcibly repatriated to countries that they never called home. This is not some dystopia led by a British Donald Trump. It is what the UK could have looked like had the proponents of direct democracy – referendums – had their way.

Britain is a representative democracy. We elect 650 MPs and we entrust them with the power to make and scrutinise legislation on our behalf. This simple method of central government (we also have devolved institutions) has done much to ensure our stability where more fragile democracies, or illiberal ones, have succumbed to disorder or fascism.

At present, we are experiencing a fetishisation of referendums: we argue this having supported the Scottish referendum in 2014, for which the SNP had an unequivocal mandate. Yet, broadly, referendums are not a uniquely democratic way to arrive at a decision of national moment but a crude majoritarian tool. The deliberative nature of a parliament, with its built-in checks and balances, safeguards it against blindness to the interests of minority groups and views and allows compromises to evolve. Referendums can too easily allow the dominant moral panic of the time to be translated into immediate action. Had they been called on the progressive social advances of the 20th century, we would now be a far less open and tolerant society.

Referendums can also undermine the basis of representative democracy. Our parliament works, on the whole, because we trust its supreme authority to make decisions. As one concedes that there are some issues that are only legitimately settled by a referendum, the question immediately arises: which ones? If the UK’s continued membership of the European Union falls into this category, why not the Budget? If the Alternative Vote does, why not the issue of military intervention in Iraq or Libya? Yet the ultimate threat to our form of democracy is not referendums but those who have instigated them. The EU referendum on 23 June was dreamed up by the Prime Minister for no better reason than that he was pressured by recalcitrant right-wingers in the Tory party, as well as the UK Independence Party and the press.

Referendums seldom settle difficult questions, as events in Scotland have demonstrated. There, a “once in a generation” vote turned out to be no such thing: rarely does a week pass without Nicola Sturgeon making vague threats about a “second” independence referendum. Moreover, Ukip’s Nigel Farage is already talking about the need for a second EU referendum before the first has even happened.

When confused voters say that they want an objective list of the pros and cons of Brexit before they can make up their minds, what they mean is that they want their representatives to regain the courage to make difficult decisions on their behalf. Britain needs a frank reminder that politics is complicated and its practitioners are often skilled and conscientious.

It would be a folly to leave the EU but it was a folly enough to call this referendum during a period of multiple crises in Europe. It is time to speak up for representative democracy.

The rise of the nativist right

Had 31,000 Austrians voted differently, Europe would now have its first far-right president since 1945. The narrow defeat of the Freedom Party’s Norbert Hofer is emblematic of the xenophobic nativism that has spread across the continent. Mr Hofer’s softly spoken, telegenic manner belied his extreme views. He has declared that “Islam has no place in Austria”, wears a blue cornflower (the historic symbol of pan-Germanism) and is an honorary member of the student fraternity Marko-Germania zu Pinkafeld, which rejects the “fiction of an ‘Austrian nation’”.

Yet far from being an outlier, Hofer has many allies. Marine Le Pen’s Front National, Frauke Petry of Alternative für Deutschland and Geert Wilders of the Dutch Party for Freedom all rallied to his cause. In Hungary, Poland and Finland, the far right holds office.

The rise of these atavistic forces is an indictment of Europe’s mainstream, most notably its becalmed centre-left. As in the 1930s, nationalists have skilfully exploited cultural and economic alienation. History provides ample warning of the consequences of allowing such extremists into power. It is a lesson that Europe should not be forced to learn again. 

This article first appeared in the 26 May 2016 issue of the New Statesman, The Brexit odd squad