New figures show inflation has hit a 40-year high, but is even higher for people on lower incomes. So what’s going on?
by: Tom Lawrence
19 May 2022
Food prices are rising around the world as inflation hits. But poorer people are coming off worse. Image: Marco Verch/Flickr
As the Office for National Statistics (ONS) admits, “one inflation rate doesn’t fit all”. The 9 per cent figure in this week’s headlines — a 40-year high — is calculated via a motley basket of goods and services known as the consumer price index (CPI).
But what you earn, where you earn it, how you make a living and your age may massively affect how much of it you are still able to afford.
The Institute for Fiscal Studies (IFS) estimates soaring energy costs mean the poorest 10 per cent of households are facing inflation of 10.9 per cent, which is almost 3 percentage points higher than inflation rates for the richest.
So what’s going on? Why does inflation hit poorer people harder?
When prices change quickly, poorer households are hit hardest. In the current crunch, the reason for this is simple: energy prices are driving inflation, and people on low incomes must spend a bigger proportion of their income to heat their homes. According to the IFS, richer households spend 4 per cent of their budgets on gas and electricity versus 11 per cent for the poorest.
Many poor households are in a bind that leaves them vulnerable to inflationary headwinds. Consider debt. Research by The Health Foundation finds more than one in 10 of people in the bottom 10 per cent of earners face problem debts, compared with less than one in 100 of the richest 10 per cent.
Some debt repayments – for example on credit cards – rise with central bank interest rates. Action from the Bank of England to tackle inflation could make poorer households’ balance sheets even more precarious.
Social housing rent is another example, the cap for which is determined by adding 1 per cent to inflation rates. Some council tenants already faced rent rises exceeding those faced by private homeowners; this time next year they could soar. Afflicted by costly energy bills, ballooning debts and eye-watering rents, low-income household budgets are struggling more than the 9 per cent figure would suggest.
Although the ONS does not provide a regional inflation breakdown, some clues point to different experiences of price rises in different areas.
For example, London’s rent is the country’s costliest. Research from City Monitor suggests median residents must spend more than half of monthly income for a two-bedroom flat, compared with just a quarter in Stoke. But private rents in the capital rose just 0.1 per cent in the twelve months leading up to January 2022, contrasting with 2.6 per cent across Scotland. Meanwhile, median monthly pay rises in Scotland (4.4 per cent) significantly underperformed the UK average (5.9 per cent).
This chaotic countrywide picture reflects inflation’s unequal impact. Londoners have priced in high accommodation costs; for the average Scottish tenant, rents are rising, wages are anaemic and living costs are climbing. Some who have been treading water up to now may sink beneath the tide.
Not all employment contracts are created equal, and not all workers feel the effects of inflation in the same way.
Much like inflation, headline figures on pay growth mask the murky metrics beneath. Across the economy, average annual pay rose 7 per cent in the three months to the end of March. But this figure includes contracts with bonuses and sign on fees. Without these payments, the average figure is 4.2 per cent. Rising prices are dwarfing pay for everyone, but the imbalance is crushing for workers without sweeteners in their terms of employment.
Even this does not tell the full story. Consider zero hours contracts: Trade Union Congress research finds the average worker on such a contract earns 59 per cent less than those on more permanent contracts to begin with. Workers doing ostensibly similar jobs may have massively different capacities to roll with the punches inflation throws. And ONS analysis for December 2021 to February 2022 period private sector wage growth was 6.2 per cent. For the public sector it was just 1.9 per cent.
Debt and age are inextricably linked: simply, young people have more of it. Student loans are pegged to the retail price index (RPI) – another measure of inflation – which, at 11.1 per cent, is currently coasting even higher than the CPI. The IFS finds that 70 per cent of people in their early 30s and 40s live in households where debts exceed interest bearing assets (like savings accounts and investments). As interest rates climb, so will repayments. For people aged 75 and above – less likely to have student loans and with mortgages paid off – the average is below 10 per cent.
The outlook for the elderly is uncertain. State pension claimants received just a 3.1 per cent uplift in April after Rishi Sunak suspended the triple lock, a mechanism which would have kept handouts in line with inflation. If it is reintroduced, it would mean a windfall for pensioners far outpacing the real terms pay cuts facing many workers. If it is not, many will struggle to make ends meet.
This is the situation faced by Boris Johnson, who claimed to be considering “all sensible measures” to deal with the cost-of-living crisis in Prime Minister’s Questions on May 18th. But the outlook differs wildly for homeowning septuagenarians and recent graduates saddled with mortgages. Whether the government truly appreciates this is unclear.
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