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.

How Jim Murphy's mistake cost Labour - and helped make Ruth Davidson

Scottish Labour's former leader's great mistake was to run away from Labour's Scottish referendum, not on it.

The strange revival of Conservative Scotland? Another poll from north of the border, this time from the Times and YouGov, shows the Tories experiencing a revival in Scotland, up to 28 per cent of the vote, enough to net seven extra seats from the SNP.

Adding to the Nationalists’ misery, according to the same poll, they would lose East Dunbartonshire to the Liberal Democrats, reducing their strength in the Commons to a still-formidable 47 seats.

It could be worse than the polls suggest, however. In the elections to the Scottish Parliament last year, parties which backed a No vote in the referendum did better in the first-past-the-post seats than the polls would have suggested – thanks to tactical voting by No voters, who backed whichever party had the best chance of beating the SNP.

The strategic insight of Ruth Davidson, the Conservative leader in Scotland, was to to recast her party as the loudest defender of the Union between Scotland and the rest of the United Kingdom. She has absorbed large chunks of that vote from the Liberal Democrats and Labour, but, paradoxically, at the Holyrood elections at least, the “Unionist coalition” she assembled helped those parties even though it cost the vote share.

The big thing to watch is not just where the parties of the Union make gains, but where they successfully form strong second-places against whoever the strongest pro-Union party is.

Davidson’s popularity and eye for a good photo opportunity – which came first is an interesting question – mean that the natural benefactor in most places will likely be the Tories.

But it could have been very different. The first politician to hit successfully upon the “last defender of the Union” routine was Ian Murray, the last Labour MP in Scotland, who squeezed both the  Liberal Democrat and Conservative vote in his seat of Edinburgh South.

His then-leader in Scotland, Jim Murphy, had a different idea. He fought the election in 2015 to the SNP’s left, with the slogan of “Whether you’re Yes, or No, the Tories have got to go”.  There were a couple of problems with that approach, as one  former staffer put it: “Firstly, the SNP weren’t going to put the Tories in, and everyone knew it. Secondly, no-one but us wanted to move on [from the referendum]”.

Then again under different leadership, this time under Kezia Dugdale, Scottish Labour once again fought a campaign explicitly to the left of the SNP, promising to increase taxation to blunt cuts devolved from Westminster, and an agnostic position on the referendum. Dugdale said she’d be open to voting to leave the United Kingdom if Britain left the European Union. Senior Scottish Labour figures flirted with the idea that the party might be neutral in a forthcoming election. Once again, the party tried to move on – but no-one else wanted to move on.

How different things might be if instead of running away from their referendum campaign, Jim Murphy had run towards it in 2015. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.

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