Nightmare on Inflation Street: the sequel

In the 1990s, we thought we had slain the big economic dragon of inflation. Now it is back – at nothing like the double-digit rates of the 1970s, but in a new and pernicious form.

Our latest research  on minimum income standards underlines just how damaging an effect it could have on the living standards of Britain’s worst-off households.

When I was growing up, inflation seemed permanently high, and briefly surpassed 20 per cent. So why should we worry that prices are now rising relatively gently, at just under a quarter of that rate? 

Two fundamental things have changed. For a long time, we assumed that, whether in high or low inflation periods, indexation generally ensures your income at least keeps pace with rising prices. Now we're seeing all sorts of cash-terms freezes, whether in public or private sector wages or in some benefits, such as child benefit.

This form of austerity hits harder the faster prices are rising. For example, victims of the two-year public sector pay freeze will become 4 per cent worse off if prices rise at the target rate of 2 per cent, but 9 per cent worse off if the present inflation rate of 4.5 per cent persists.

The second change is that inflation is being fed particularly by worldwide rises in commodity prices, rather than by an overheating of the UK economy. This matters a lot to the distribution of purchasing power among the population. Poorer groups, who spend a higher proportion of their income on things like food, which have risen a lot in price, are hit harder than richer groups. And those depending on benefits, which are uprated only by a general inflation index rather than by the rise in their own costs, will get steadily poorer. 

Our minimum income standards work shows that this has already happened in a big way over the past decade. Large increases in the price of things like food, home energy, council tax and public transport have pushed up the cost of a minimum household ‘basket’ of goods and services by 43 per cent since 2001. The Consumer Prices Index (CPI) rose only 27 per cent over that period. Anyone on a low income that only rose by CPI will be significantly worse off. There is every prospect that this phenomenon will continue.

The real nightmare of Inflation: the sequel, therefore, is that it will mean those with the least in our society will have even less. I have not in my lifetime witnessed a sustained rise in the levels of absolute poverty in this country, and I find the present outlook quite frightening.