This seems like a good week to talk about the cost of living. On Tuesday, the UK Coalition Government put up VAT (sales tax) from 17.5% to 20%, which it somehow tried to spin as a ‘progressive’ move. This comes at the very time that petrol and food prices are rising – and this is without even starting to think about the numers of people whose incomes are declining due to unemployment or underemployment in the recession.
This all reminded me of the problems with looking at inequality through simple measures of income. Personally I prefer looking at expenditure inequality, because it more closely measures standard-of-living and avoids some of the problems with measuring inequality at the bottom of the income distribution – and it shows different trends in the UK, as the peerless Institute of Fiscal Studies have shown.
But both measures miss differences in the cost of living between rich and poor. Brian Landers over at opendemocracy has argued that lower earners inadvertently end up subsidising the rich through the pricing behaviour of supermarkets and car firms (h/t: Learning From Dogs). And more systematically, because richer and poorer people spend their money on different goods and services, they face different inflation rates, which are sometimes higher and sometimes lower.
While the IFS has – again – done some excellent work on this, the killer chart below comes from The Resolution Foundation, via Left Foot Forward. (We’ll be hearing much more from the Resolution Foundation; they’re a charity that focuses on low-to-middle income earners, who are now run by Gavin Kelly, the gifted ex-deputy chief of staff for Gordon Brown. The graph itself comes from p68 of the Nov 2010 version of their exhaustive regular audit of the position of low-to-middle earners in the UK).
To interpret the graph, think of this as a cumulative inflation index from 2000 to the present day, comparing the different inflation on the goods typically bought by lower earners and higher earners. Put simply, it shows that low-to-middle earners (‘LMEs’) pay £150/year more in 2010 than if they’d see the same average inflation since 2000 as higher earners. This has even come down in the past couple of years, down from a high of £300/year in early 2009.
My guess for early 2011? That we will see another jump in the cost-of-living for lower-income households, while mortgage-holders continue – at least for a little longer – to reap the benefits of low interest rates. Perhaps there are other, greater contributors to inequality happening this year in the UK, but we shouldn’t forget about the real impact of cost-of-living rises.