We are in unprecedented times. In July 2022, UK inflation made its biggest monthly change since records began, leaping to an annual rate of 8.8%, more than double the average for the last 20 years. The figure was last that high when Margaret Thatcher was in her first term as Prime Minister, and today’s 40 year olds had not yet been born. It is forecast to go on rising, but more than half the population have never experienced life in these circumstances.
So what does it mean?
How is inflation measured?
Inflation is a measure of how prices are rising over time. However, prices do not all rise at the same rate: the price of wheat may rise because of a poor harvest, while fuel prices remain steady.
So we need an “index” which balances the various kinds of price against each other. The main one is the Consumer Price Index (CPIH) which replaced the Retail Price Index in 2013 (the ‘H’ means that housing costs have been included).
To calculate the CPIH figure, each month, the Office of National Statistics (ONS) carries out a survey of around 120,000 retail outlets. They check the prices of a “basket” of 700 goods and services, balanced to reflect the spending patterns of the average consumer.
Each year the contents of the basket are revised to reflect changing behaviour, as we spend more on some things and less on others. This year, canned pulses, sports bras and antibacterial surface wipes were added, and doughnuts, men’s suits and coal were removed.
What’s in the basket?
To arrive at a single figure for inflation the various components are weighted, to reflect how the average consumer spends their money. As the table shows, housing forms the biggest element, and health the smallest.
What are the big price rises?
In the last year, the biggest rises have been:
Housing (including heating) rose by 9.1%.
Transport rose by 15.1% , mainly from fuel prices, which rose by 43.7% on the year.
Food and non-alcoholic beverages rose by 12.7% with the biggest changes in bread, cereals, milk, cheese and eggs.
Restaurants and hotels, rose by 9.0%, the highest on record, mainly from accommodation services.
It is not the same for all of us
However, most of us are not average consumers. As campaigner Jack Monroe has highlighted, those on low incomes spend more of their income on the basics. Food forms 14% of the budget of the poorest ten percent, but only 8.5% of the richest. Housing forms 25% of the budget of the poorest, and 10% of the richest. So, when prices of food and heating rise faster, they take a bigger hit. Obviously, a measure based on the “average” person will often underestimate what inflation is really like for poorer people.
The Office of National Statistics has recognised the problem, and is exploring how to best measure it. At the end of May they published a first set of “experimental statistics” on this, based on the prices of 30 everyday items typically bought by the poorest consumers. They use data taken from the websites of seven major supermarkets.
These statistics are “experimental” because there are a number of difficulties about collecting appropriate data, and calculating how to weight the results. They note that the price gap between the cheapest and next cheapest item is often large (20-50%), and the cheapest item may not actually be on sale in any given supermarket. Also, many poorer people do not have easy access to one of the major supermarkets, and are dependent on local retailers, where prices may be very different.
The number of “value” items on sale in a supermarket may be shrinking, forcing people to substitute items. There are also questions about how to account for substitute items. Prices for different types of cooking oils, for example, have gone in different directions, making the cheapest this year different from last year. There is also evidence of “shrinkflation”, where the price remains the same, but the size of the pack shrinks. While ONS have tried to gather information to adjust for these problems, they stress that their findings are still provisional, and they are still refining their methodology.
However, this work is an important step towards understanding the issue, and they have now published their experimental findings. These show that, while thirteen of these items have gone up in price, nine have gone down. Perhaps surprisingly, they calculate that overall, up to now, inflation is around the same level for poorer people as for consumers in general. However, the Institute for Government points out that since the ONS published their figures, heating costs, which form a larger proportion of the spending of poorer households, have risen sharply. They also note that richer households are often better able to adjust their spending patterns (like reducing savings) to cope with such rises.
What next?
The August inflation figures are bad news for everyone. Since housing (including heating) and transport already constitute 42% of the average household’s expenditure, a rapid rise in fuel costs will hit those on middle and even high incomes as well as the poorest.
Even if the ONS is right that inflation for the poorest has not been as severe as some suggested, the latest rise in heating costs will certainly hit them hardest. And they will certainly be the first to be tipped into destitution by the expected changes.
The present situation is certainly the worst since the 1970s, and for many people may be even worse. Meanwhile, we have no effective government, and it is left to Labour, LibDems and the Trades Unions to propose plans to tackle the crisis.
Advocates of small government have no answers to offer. Only government can intervene to prevent a real disaster. The new Prime Minister will face an unavoidable, but unenviable task.
