Cost of living · UK Economics · UK Politics

UK: Inflation, Cost of Living, Wages & Living Standards

Definition

Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling”

So for instance….

 Screenshot 2017-07-29 18.29.43

So if you notice, whilst between 2015-16 it would be reported that inflation has fallen, the actual price and or cost has still gone up!!

Lets take a look at wages. Whilst there was 5% pay rise in 2015-2016 (£100 => £105) and 2016-2017 (£105 => £110.25), because there was no rise in 2014-2015 to match price increases, by 2017, the person is suffering lower living standards!! Why because between 2014-2017, cost of living rose by 11% and wages by 10.25%!!

Note of caution, when looking at such figures, always be aware that the choice of ‘Base year’ could also distort your perception of the rising costs.

Basically if there is a shortage/ insufficient supply compared to demand for an item or service, price will go up without any addition to output! A company producing 100 widgets still can only produce 100 widgets right now but the price has now gone up!! This is ‘demand-pull’ inflation. A shortage of habitable houses and hundreds of thousands of prospective buyers will inevitably drive house prices higher, esp. in sought after areas with nice schools, low crime, proximity to modes of transport, parks etc.

Alternatively, rising cost in producing an item or in delivering a service would lead to ‘cost-push’ inflation. A falling sterling pound would make imports of raw material expensive. This then makes the final finished products more expensive although as mentioned earlier only 100 widgets are being produced. Here inflation was not led by increase in demand for the goods but simply by more expensive input costs. Similarly from a employer’s narrow viewpoint having to pay a living wage would mean higher costs for the same output of the business. We can challenge that but that is beyond the scope of this piece.

So, with basics out-of-the-way, lets turn our attention to an average households. According to government inflation figures that have been changed from RPI to CPI, the current inflation rate is about 2.9%.

Screenshot 2017-07-29 15.48.03

What is the difference between RPI and CPI you ask? Retail Price Index takes into account costs of housing (mortgage & council tax) whereas CPI does not. So this government instead of dealing with the issue of rising cost of living, decided to simply dropped one of the most important bit! Great thanks George!!

From personal experience, I wanted to look at what has happened to the key household bills over the last decade. Whilst those with tracker mortgages have done very well and hence been left out here, I looked at rent, food cost, gas & electricity bills, council taxes, child care cost, transport and university tuition fees. The purpose was to get a better sense of household costs as it is felt rather than as it is reported in media.

Rent whilst a mixed picture, soaring in London!

Let’ start with one of the biggest one – rent. In London over the last decade, it has shot up 45%. I can guarantee you that most wage packets have not budged much since 2010!!

Screenshot 2017-07-29 11.43.23

Worth noting that additional £500 in rent per month in London would mean less spending in the local high street, less savings and longer working hours. It would also mean the likes of Phil Hammond who pockets £10,000 a month from rents is not likely to help change this situation.

This is worth reading too – https://blogs.spectator.co.uk/2015/05/why-cant-we-have-an-inflation-index-which-includes-house-prices/

Lets look at food bills…

The percentage price rise are all in double digits. Food overall increased by a whopping 32% between 2007 & 2015!! Any wages that have matched this?

Screenshot 2017-07-29 12.07.00

Household Utilities

We know cost of Water & Sewerage is about £60 a month.. so what about gas & electricity! Whilst the figures are only up to 2014, rise from 2004 to 2014 was an eye watering 140% and that between 2007 to 2014 a mere 57%!! And here we thought privatization was going to lower our bills whilst improving efficiency and service!

Screenshot 2017-07-29 11.48.00

Council Taxes

Council Taxes whilst have remained unchanged in many councils, according to the report below increased by 58% between 1996-97 and 2015.

(Source: http://www.taxpayersalliance.com/taxpayers_alliance_reveals_a_real_terms_increase_in_council_tax_of_58_per_cent_since_1996)

Childcare Costs

What about Child care costs? Now I don’t know about you, but these are pretty hefty numbers. In London for under 2 year olds looking at paying out £7500 per year from your after tax disposable income!! (If I find a 2007 fig, I’ll add this here)

Screenshot 2017-07-29 14.05.56

Fares & Fuel Costs

Lets turn to transport cost…. well no joy there too!! With the exception of one-day travel cards using Oyster Card, transport costs have shot up by about 50-55%!!(Source: https://londonist.com/2011/11/london-transport-fares-2000-2012  Updated 15/16)

Insurance costs for new drivers could be in excess of £1000  with typical insurance costs between £250-£550 imo!!

Cost of fuel has gone up by 33% for unleaded & diesel since 2007!(source: https://www.petrolprices.com/the-price-of-fuel.html)

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What about University Tuition Fees? 

Screenshot 2017-07-29 14.03.25

As if  life wasn’t unfair enough, we learnt last week that the Tory govt has put the Tuition fees on an automatic escalator which means the fees for this year has just gone up by £250 per year per student!! Interest rates are 3% above inflation .. so about 6%… won’t they supposed to be interest free loans?

The threshold of £21,000 has been left unchanged despite the rising inflation which means more kids on insufficient earning will start paying sooner but will end up paying minimum payments for longer!

Potential debts of up to £57,000 has meant many kids from poorer backgrounds are dropping out early without finishing their education! Without the help from ‘bank of mum and dad’ poorer will take longer to fully pay back their loan which mean that they’ll not only end up paying more than wealthier kids but also will miss out on accumulating enough deposit sooner to get a foot on the housing-ladder. Education which is supposed to facilitate upward social mobility will do the reverse imho!!

(Source: https://www.theguardian.com/education/2017/jul/05/poorest-students-will-finish-university-with-57000-debt-says-ifs)

Wages as share of GDP, Household income and Living Standards

So if everything has gone up, why is the inflation shown as anywhere near the annual 5% mark? What is depressing this overall number? Can the same be linked to levels of inequality?

Well of course… its our wages!! If the cost of production or services goes up for a business that wishes to maintain its profits, will push prices to the complacent buyer/ shopper and/or squeeze wages!! Guess what’s happened to wages. According to this article –  http://www.independent.co.uk/news/business/news/uk-workers-have-had-the-worst-wage-growth-in-the-oecd-except-greece-a7773246.html  – UK real wage have fallen by more than 5% compared to 2007! Mind you this is an average wage including sectors that may have seen wage growth… hence it underplays the other sectors where wages would have fallen more sharply. Also, youngsters have according to this report, felt the brunt of it with a whopping 16% pay cut!!

According to this FT article – https://www.ft.com/content/83e7e87e-fe64-11e6-96f8-3700c5664d30 – UK alone has seen wages fall whilst economy is growing! This could be because whilst overall economy might be producing more widgets, there might be a larger population that makes these widgets, al beit at a slower rate.

Screenshot 2017-07-29 17.39.56

(Source: https://mainlymacro.blogspot.co.uk/search?q=uk+wages  – Simon Wren-Lewis)

Alternatively, it could be that employees and providers of labour (ordinary households) have again lost out to owners of land & property and to employers or owners/ providers of capital! Looking at share of wages or labour versus share of profits could give an insight as to whether or not this redistribution is going on at the national level. The slides from http://www.EconomicsHelp.org give possible explanation for this rare phenomenon.

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Now if inflation is higher than wage increases, in effect workers are working at least as much as they did the previous year, generating atleast as much output as in that year plus a bit more whilst getting paid less in real terms and also whilst paying much larger bills to help maintain the profitability of the firms selling the products. It is important to realise that an ordinary family thus gets hit at least twice once as an employee and secondly as a shopper/ buyer. If the terms of employment changes such that the person loses perks and/or has to contribute more towards a pension pot they lose out once again. Furthermore if this pension pot is now deemed to be smaller than when they first joined employment, they have lost out again!! Simultaneously, a government that is relentlessly weakening the safety net of the welfare state, would further erode away the rewards of an individual in full-time employment.

I hope this blog post goes in some way to explain inflation in simple terms and how it relates to cost of living.  Apologies for all the graphs but if you have any queries or feedback to improve this post, do get in touch. I’ll be happy to update this.

(@GaurangMorjaria – WeThePeople)

https://www.paypal.me/GaurangMorjaria

 

 

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3 thoughts on “UK: Inflation, Cost of Living, Wages & Living Standards

    1. Thank you David. From what I have gathered even the CPIH has its shortcomings where by it assumes that the house owner is paying rent on his/her property. Also the inflation report gives a weighting of just 12% to housing & utility costs… that’s just plain wrong when in many households the key driver of costs is rent which is around 35-40% or higher & food accounting for another 15%. Again, debt interest payments are excluded which is another major component of a household’s cost of living imho
      Kind regards, Gaurang

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