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Nightmare on Inflation Street: the sequel

April 18, 2012

Just when you thought it was safe to go into the bank again…

When I was a teenager in the 70s, Inflation was the big economic dragon to be slain. By the 1990s, it seemed to have gone away, and even today with rates of 4% being billed as alarmingly high, it’s hard not to be complacent when you remember that double-digit rates were once the norm.

However, two fundamental things have changed in our recent experience of inflation.  For a long time, we have been used to the idea 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 public sector wages or in some benefits, such as child benefit. This is part of an austerity package, but its impact will be different according to the inflation rate. For example, if your pay is frozen for three years and inflation runs at the target rate of 2% you will end up 6% worse off; if it runs at 4% you’ll be 12% worse off. In this sense the inflation rate impacts more directly on real living standards than it has in the past.

The second thing that has changed 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 more than richer groups. And those depending on benefits that are uprated only be a general inflation index rather than the rise in their own costs, they will get steadily poorer.

My analysis shows that this is precisely what is happening now. I have used my work on Minimum Income Standards to analyse it, and shown that there’s a risk of a deepening of absolute poverty, of a kind not seen previously in my lifetime. Here is my published analysis of this phenomenon, seen from the prism of the effects of globalisation on UK living standards. This work’s been taken up in the Guardian, on BBC Radio 4’s Today programme, and I explain it in this summary on the Resolution Foundation’s blog


From → inflation

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