Are things getting more expensive?
05 December 2006, 11:22 AM
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Are things getting more expensive?
The Telegraph and Capital Economics have joined forces to unravel the puzzle that is UK inflation - and they've found, somewhat unsurprisingly, that life is rather a lot more expensive for most people than the Government - which puts official inflation (CPI) at 2.4% - likes to let on.
Even if you take the old Retail Price Index measure, which at 3.7% includes things like council tax and mortgage costs, you don't approach anything like the true picture of living costs for most people.
According to Capital Economics' findings, pensioners suffer the highest rate of inflation in the UK, at more than 8% a year, mainly because a disproportionate amount of their income goes on the basics like fuel and food. Middle class families are next, on an average annual inflation rate of just under 6% - school fees don't come cheap, after all. In fact, the only people who aren't paying more than RPI inflation are young professionals, and people who are living at home with their parents (who presumably have especially high rates of inflation, to cover their offspring's living costs).
Of course, one broad measure cannot match everyone's specific circumstances. As Bank of England governor Mervyn King pointed out when he appeared before the Treasury Select Committee last week, "If we were each to calculate our own individual inflation rate around this table, we would each come out with a wide variety of different numbers."
But as can be seen from the gap between CPI, at 2.4% and RPI at 3.7%, there's more than one way to take an inflation average - and you can bet that the one chosen is likely to be the one most flattering to the people in charge. Officials claim in their defense that CPI, RPI and other measures of inflation are not intended to measure the cost of living - but that does make you wonder, what exactly is the point of such a measure in that case?
The big problem with an official inflation measure that doesn't reflect most people's experience, is that it diminishes faith in the official statistics. If people stop believing the official figure, it can lead to higher inflation expectations. If people believe prices are going up, they demand higher wages. As regular readers will know by now, higher wage demands tend to feed into higher prices as companies jack up the cost of their goods to pay the higher wage bills. Rising prices in the shops then make people demand more wage hikes, and so the vicious cycle develops.
Talking of inflationary wage demands, one group of workers certainly seems to think that the cost of living is running far too rapidly ahead of their salaries - MPs. Our representatives believe that the typical MP's salary of around £60,000 a year isn't enough. Some Labour MPs are reported to have been muttering that £100,000 was the right level - but the general feeling is that they should be on round about £70,000 to £75,000 now to keep up with what they describe as "comparable occupations."
Let's ignore the typical annual allowance bill of £134,000 that MPs rack up in staff and expenses for the moment - although interestingly, The Telegraph reports that some MPs are "thought to favour a cutback in their allowances in return for increasing basic pay to a six-figure level" - which suggests that not all of that 'allowance' money is going on stamps and taxis. But anyway...
One of the complaints made by a nameless Labour backbencher was that he was now earning almost £100,000 less than one of his local GPs. This raises an interesting prospect. The main reason that GPs now earn so much more is because of Gordon Brown's massive spending splurge on the NHS, which so far seems to have resulted in nothing more than NHS staff being paid more for doing less work.
If a pay rise had the same impact on MPs' productivity as extra wages have had on the rest of their public sector peers, we're all for it. If giving MPs a rise of, say, 60% meant that politicians would do 60% less work, that could be great for the country. Imagine if the Treasury's output of tax law fell by 60% next year. Or if 60% fewer pointless proposals on cuddly initiatives were made by David Cameron.
Even if you take the old Retail Price Index measure, which at 3.7% includes things like council tax and mortgage costs, you don't approach anything like the true picture of living costs for most people.
According to Capital Economics' findings, pensioners suffer the highest rate of inflation in the UK, at more than 8% a year, mainly because a disproportionate amount of their income goes on the basics like fuel and food. Middle class families are next, on an average annual inflation rate of just under 6% - school fees don't come cheap, after all. In fact, the only people who aren't paying more than RPI inflation are young professionals, and people who are living at home with their parents (who presumably have especially high rates of inflation, to cover their offspring's living costs).
Of course, one broad measure cannot match everyone's specific circumstances. As Bank of England governor Mervyn King pointed out when he appeared before the Treasury Select Committee last week, "If we were each to calculate our own individual inflation rate around this table, we would each come out with a wide variety of different numbers."
But as can be seen from the gap between CPI, at 2.4% and RPI at 3.7%, there's more than one way to take an inflation average - and you can bet that the one chosen is likely to be the one most flattering to the people in charge. Officials claim in their defense that CPI, RPI and other measures of inflation are not intended to measure the cost of living - but that does make you wonder, what exactly is the point of such a measure in that case?
The big problem with an official inflation measure that doesn't reflect most people's experience, is that it diminishes faith in the official statistics. If people stop believing the official figure, it can lead to higher inflation expectations. If people believe prices are going up, they demand higher wages. As regular readers will know by now, higher wage demands tend to feed into higher prices as companies jack up the cost of their goods to pay the higher wage bills. Rising prices in the shops then make people demand more wage hikes, and so the vicious cycle develops.
Talking of inflationary wage demands, one group of workers certainly seems to think that the cost of living is running far too rapidly ahead of their salaries - MPs. Our representatives believe that the typical MP's salary of around £60,000 a year isn't enough. Some Labour MPs are reported to have been muttering that £100,000 was the right level - but the general feeling is that they should be on round about £70,000 to £75,000 now to keep up with what they describe as "comparable occupations."
Let's ignore the typical annual allowance bill of £134,000 that MPs rack up in staff and expenses for the moment - although interestingly, The Telegraph reports that some MPs are "thought to favour a cutback in their allowances in return for increasing basic pay to a six-figure level" - which suggests that not all of that 'allowance' money is going on stamps and taxis. But anyway...
One of the complaints made by a nameless Labour backbencher was that he was now earning almost £100,000 less than one of his local GPs. This raises an interesting prospect. The main reason that GPs now earn so much more is because of Gordon Brown's massive spending splurge on the NHS, which so far seems to have resulted in nothing more than NHS staff being paid more for doing less work.
If a pay rise had the same impact on MPs' productivity as extra wages have had on the rest of their public sector peers, we're all for it. If giving MPs a rise of, say, 60% meant that politicians would do 60% less work, that could be great for the country. Imagine if the Treasury's output of tax law fell by 60% next year. Or if 60% fewer pointless proposals on cuddly initiatives were made by David Cameron.
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