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6 February 2014

How the poor have been hit hardest by inflation

New data shows that the cost of essentials such as food and energy has increased most rapidly over the last five years.

By Lindsay Judge

It’s hardly news that the incomes of poorer families have been squeezed until the pips squeak. Declining real wages, underemployment and cuts to social security have all combined to drive down the living standards of those at the bottom of the income distribution in recent years. But low-incomes families have had to contend with another downward pressure that until yesterday we may have intuited, but hadn’t yet seen fully evidenced.

Now we know for sure that poorer families have experienced higher levels of inflation than the better off and, indeed, the average, since the recession began. Analysis published yesterday by the Institute for Fiscal Studies ably demonstrates this by taking the price rises of various goods in recent years and then putting these together with information about which items are more or less readily consumed by different income groups.

Unsurprisingly, it shows that the cost of essentials such as food and energy have increased rapidly over the last five years (at about 30 per cent and just under 60 per cent respectively). The same is true for others key goods such as transport and education, while the costs of some items such as mortgage interest payments have drifted steadily downwards over the same period.

Since a lower income family’s consumption basket is full of the basics, these trends have hit the poorest hard. In fact, the IFS estimates that those on lower incomes have experienced average price rises that are 7.1 per cent higher than those of the top income quintile since 2007/8. As a result, poorer families’ living standards have been depressed more than accounts that use an average inflation figure might suggest. Likewise, the squeeze on those in higher income brackets is overstated by the standard methodology.

In fact, this exercise still doesn’t give us a full picture of how low-income families are being pinched hard by prices. As the IFS makes clear, its analysis does not capture the way that the same good can cost more or less for different types of consumers – the “poverty premium” effect well documented in a report last year from the Joseph Rowntree Foundation. Poorer families are doubly disadvantaged then: the items they consume in quantity have gone up in price quicker than other goods in recent years, and they often have to pay more than their better off peers for these basics too.

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But what are the political implications of all this? For a start, this new analysis undermines the claim that poorer groups have had an easier ride than others during the recession because benefits – a largish part of their incomes – lost less of their real value than earnings. And looking forward, it shows the government is significantly underplaying the impact on poorer households of its 2012 decision to uprate most key benefits at a sub-inflation 1 per cent for three years.

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All in all, if you are poor, the cost of living conversation just acquired a new and sharper edge.