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17 February 2015

Record inflation low: is there a blind spot in our living standards debate?

The UK inflation rate has fallen to a record low of 0.3 per cent in January – time to talk about consumer policy.

By James Plunkett

Inflation figures are out and, as expected, they show another fall in CPI (Consumer Prices Index). The headline rate of inflation now stands at just 0.3 per cent. No doubt this will cue another round in the debate between the living standards optimists and pessimists, as one side points to rising real wages while the other counters with job insecurity and sustained welfare cuts.

These debates are familiar and, as the Resolution Foundation—arbiter of all things living standards—notes, there is truth on both sides; 2015 brings both sunshine and clouds. But there are also other reasons to think the story of living standards is poorly served by a simple political argument about whether incomes are rising or falling. Incomes are important, but they miss the consumer side of the picture. For example, when you take out a loan, do interest and charges rack up suddenly and unexpectedly? Do consumer contracts hook you into services you’d rather escape? Is advertising misleading, making it harder to compare deals? This is partly about prices, but it’s also about what we buy and how—it’s about how well consumer markets work.

Today a new report from Citizens Advice explores this question. It takes data from the 1.4 million people who turn to their local Citizens Advice with a consumer problem each year, and the 1.2m calls to our consumer helpline, to get the measure of consumer market failures. The report reveals a range of troubling problems, from new forms of consumer credit like Logbook Loans to well-established consumer failures like those in the private rental sector. And the fallout it highlights is not trivial. People who called Citizens Advice with consumer problems faced an average loss of £250 while a quarter faced losses of £600 or more, amounts comparable to many welfare cuts.

It is the individual cases that really bring home the impact of consumer problems on personal finances. One of our clients borrowed £2,250 against his £8,000 car and, after interest and fees racked up, his car was repossessed. He’s now being chased for an additional £5,000. Another Citizens Advice client asked her landlord to tackle the mould in her flat and was evicted in response. One had signed up to a new broadband contract; the broadband was still not installed two months’ later, and he was then charged £120 to exit the contract. In Westminster circles such cases risk feeling small against the big politics of welfare and state spending, but for the people involved the financial impacts are anything but. £250 is equivalent to 9 per cent of monthly income or 19 per cent if you’re on a low income (in the bottom quintile). £600 is more than a full week’s spending for the average household—and again lower income households face the biggest shocks.

How do such losses weigh up against our wider debate about wages and living standards? It’s hard to add up the overall losses from consumer market failures. Consumer issues range widely, from credit troubles to substandard housing to failed electronics, and losses often go unseen before they’re pointed out. One survey suggests total consumer detriment amounts to £4.15bn a year but this doesn’t include hidden losses from rip-offs like Payment Protection Insurance which can go unearthed for many years. Consider that banks have now set aside £24bn for PPI compensation alone, a figure so large it boosted GDP, and it’s clear £4bn could be the tip of the iceberg.

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Could this be the year consumer policy becomes more prominent in political debate? Labour have clearly sought to stake the ground with some high profile pledges. Interestingly, though, it’s regulators in this parliament who are starting to show what a more assertive approach could look like. Martin Wheatley is leading the Financial Conduct Authority to a bolder, more consumer-facing role with tough action on payday loans and credit brokers. Now Sharon White, the tough and widely-respected head of public spending at HMT, is off to run Ofcom next month. And as many on the right have argued, there’s no reason consumer policy shouldn’t be competed political territory. There is of course an obvious attraction: if you get it right, consumer policy can relieve pressure on households without costing the state money.

James Plunkett is head of consumer, public services and campaigns at Citizens Advice. He tweets @jamestplunkett

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