The essential inflation index

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It is hardly surprising the economy is so limp, given how living costs are being squeezed, with wage growth running well behind inflation. As the ONS recently reported, real incomes are at their lowest level for a decade. The level of inflation is of particular importance to savers, of course, especially those who have retired and cannot replenish their savings. With interest rates below the level of inflation and likely to remain so, the nation’s savings are being whittled away steadily, effectively transferring wealth from savers to borrowers.

But just how much inflation is there? Many of us feel that CPI inflation numbers (2.7% for the past four months) do not adequately reflect our own experiences of the rising cost of living. At least the older index, RPI, currently at 3.3%, takes into account housing costs. Yet with petrol, energy, food and so many more staples of everyday life costing so much more of late, perhaps even RPI is not giving the true picture. Those on lower incomes and fixed incomes in particular find that essentials comprise a substantial part of their outgoings; there are many products included in the official indices which people might wish to purchase from time to time, but are in no way everyday, must-have items.

The insidious nature of inflation

One of the major problems with inflation is its stealthy nature. You need to be alert to realise just how much your purchasing power is declining. A study by Lloyds TSB Private Banking reminds us that the value of our money has fallen by 67% over the past 30 years. In other words, you now need £299 to have the purchasing power which £100 had in 1982. The study points out that even if inflation stayed in line with the government’s 2% target, our would decline in value by more than half by 2042.

But inflation is not a problem of the past. It is still with us and inflationary pressures are building. With the Bank of England apparently willing to see CPI remain above the 2% target for at least two years and Mervyn King and two of his MPC colleagues keen for more QE, the pound has been extremely weak. This is going to increase the cost of imports. Even if inflation stayed in line with the government’s 2% target, the Lloyds study points out that our money would decline in value by more than half by 2042. The situation is likely to be far worse than that.

With many of us distrusting official inflation statistics, we should give thanks to Tullett Prebon’s Dr. Tim Morgan. Always a breath of fresh (if gloomy) air amidst the general “if we just hang on, maybe it will get better” economic consensus, he has been troubled that the CPI and RPI figures don’t paint a true picture of rising living costs for many people. “One of the main reasons for the retail slump,” he says, “is simply that people have too little money to spend.”

The TP UK Essentials Index

While nominal wages increased by almost 10% between 2007 and 2012, CPI prices rose by 17%, meaning that real incomes declined by 6.3%.

However, Morgan points out, the costs of a string of essential purchases have risen much more steeply. In those five years, vehicle tax and insurance has gone up 88%, petrol 56%, electricity and gas 46%, bus and rail fares 32%, food 30% and water 24%. These are not discretionary items but unavoidable costs and inflation numbers ought to reflect this.

Tullett Prebon has therefore launched its UK Essentials Index measuring changes in the price of: food; alcohol and tobacco; council tax, water and home insurance; electricity and gas; vehicle excise tax, insurance and fule; and bus and train fares.

This index shows a rise since 2007 not of CPI’s 17%, but 33%, double the official number. As Morgan points out, “consumers are being squeezed by the steady escalation in the cost of essentials. Not only does this crimp discretionary incomes to the point where no expansion in consumer spending can be expected, but it also bears particularly heavily on pensioners and other low-income households. It is a critical missing component in the business, economic and political debate.”

Famously, a couple of years ago the New York Federal Reserve President, William Dudley, found himself facing questions from the general public (sadly, Mervyn King is never in such a position). Somebody asked Dudley, “When was the last time you went grocery shopping?” only to be informed that anyone could buy an iPad 2 for the same price as the first iPad, proof that there was no rise in living costs. The audience did not take it well and the newspaper headlines trumpeted: “Let them eat iPads”.

The Tullett Prebon Essentials Index will be published every month and will, we hope, quickly establish itself as a counterweight to the over-rosy picture painted by the official inflation statistics. Highlighting as it does the extraordinary rises in the prices, not of iPads, holidays and smartphones, but the essentials of everyday life, it will help emphasise the true nature of the inflationary beast. In so doing, it could prove to be of invaluable service to savers.

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5 Comments

1. Brian

   March 2, 2013 at 7:39 pm

   Great idea, I did read the Tullet Prebon article but did not realize that they intend to update it monthly. Would be good to see you put it up on Save Our Savers. I have thought for a while that the UK would benefit from a UK version of Shadowstats.com

   Recommend (7)
2. John.

   March 2, 2013 at 10:46 pm

   Confirms the numbers behind the reality of what many have been seeing and suffering. Also confirms government figures, much like the debt money used to enslave everyone, isn’t worth the paper it’s written on.

   Recommend (6)
3. Andy

   March 4, 2013 at 10:07 pm

   Nice article – good to see some research being undertaken in this area. Let’s hope the UK govt don’t respond in the same way as the Argentinian one did and prosecute the publishers!

   Recommend (7)
4. DL

   March 5, 2013 at 12:14 pm

   Everybody should forward a copy of this to their MP and insist that a new inflation index should be based on it – I will forward to my MP. It’s obvious to me that there must be some sort of massaging of the figures to reflect a more rosy picture – or am I just a cynic?

   Recommend (6)
5. frances

   March 5, 2013 at 12:53 pm

   My illustrious MP INSISTED that CPI was a more suitable index for Pensioners
   since CPI does not begin to equal the inflation even the ONS agree is hitting Pensioners at 7% and rising

   As for Interest rates my income has nose dived from 16K to 7 K and my MP says that a free bus pass makes up for it !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

   Recommend (7)