The cost of living



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THE COST OF LIVING

This outline of changes in the cost of living sets out the rates of inflation that workers have been facing over recent months and years, the main factors in those changing costs, the forecast levels of inflation in coming years and estimates of the differing level of inflation facing the low-paid.


1. Historical inflation rates

The most widely reported measure of inflation in the UK is the Consumer Prices index (CPI). However, the most accurate indicator of changes in the cost of living facing workers is the Retail Prices Index (RPI) [for the reasons why RPI is most relevant, see section 6 below]

RPI inflation has been running between 2.5% and 3.5% over most of the last three years, but went into sharp decline during the autumn of 2014. The latest inflation figures to June 2015 put RPI at 1% and CPI at 0%.
Source: Office for National Statistics website at www.ons.gov.uk

Between 2010 and 2014, the cost of living, as measured by the Retail Price Index, rose by a total of 19.8%.



2. Impact on real wages

The most recent data from the Annual Survey of Hours and Earnings suggests that the real value of average UK pay packets has fallen by 12% since 2010, with employees losing over £2,000 a year from the value of their pay packet since the government came to office. The average worker would have accumulated more than £13,000 more had their wage kept pace with inflation.

For the public sector worker who has not benefited from any incremental progression in their pay, the decline has been even sharper. Between 2010 and 2014, the public sector worker on the median wage saw a 14% cut in the real value of their earnings, leaving their 2014 wage £4,800 down on the value of their earnings at the start of 2010 and the accumulated loss from their wage failing to keep pace with inflation each year stood at over £16,000.
3. Main factors affecting inflation

The changes in the price of components of the Retail Price Index over the year to June 2015 are shown in the table below.



Item

Average % increase to June 2015

Personal expenditure

3.9

Consumer durables

3.0

Alcohol and tobacco

2.3

Housing and household expenditure

1.9

Mortgage interest payments and council tax

1.0

Travel and leisure

-0.7

Food and catering

-1.0

All goods

-0.7

All services

2.1

All items

1.0

Source: Office for National Statistics, Consumer Price Inflation Reference Tables, June 2015

The drop in the inflation rate has been driven by declines in electricity and gas prices after years of strong growth, along with falls in food prices. However, the biggest cause has been the major fall in oil prices. Nonetheless, some costs rose significantly, with a 6.7% acceleration in prices for clothing and footwear, along with a 3.7% rise in travel fares.

The price of housing also remains one of the biggest issues facing employees and their families. Across the UK, house prices rose by 5.7% in the year to May 2015, taking the average house price to £274,0001. However, the picture varied across the nations of the UK, with Northern Ireland experiencing the biggest increase at 10.5%, followed by England at 5.8%, Scotland at 2.9% and Wales at 2.5% (to see price changes in English regions, click here , or for a borough / county breakdown click here ). The ratio of average house prices to average earnings grew in every country of the UK between 2012 and 2013 except Scotland. The ratio stands at 11.8 in England (14 in London), 8.7 in Wales, 8.4 in Scotland and 7.1 in Northern Ireland2.

The rate of increase in rents has been increasing to the point that it is now outpacing house prices, jumping 5.6% in June to hit a new record high across England and Wales of £789 a month3 (for a regional breakdown of rents click here ). New tenancy rates have been increasing even more rapidly, with a jump of 11.6% across the UK in the year to June 20154 taking average reats to £982 per month. For a regional breakdown on rental price inflation click here

Though not specifically assessed by CPI or RPI figures, childcare costs represent a key area of expenditure for many staff (UNISON surveys have consistently found that around a third of staff have child caring responsibilities).Therefore, it is also worth noting that the annual Family & Childcare Trust survey5 for 2015 found that the cost of a part-time nursery place for a child under two has increased by 33% since 2010. Over the last year, a nursery place for 25 hours a week has risen by 5.1% to £6,003 a year. The cost of part-time care from a childminder has also risen by 4.3% to £5,411 a year.

Current inflation rates can mask longer term changes in the cost of living that have taken place since 2010. For instance, food price inflation is currently quite low, but between 2010 and 2014 it saw major rises, as reflected in the table below.



Item

Rise in cost since 2010

Item

Rise in cost since 2010

Item

Rise in cost since 2010

Food

13%

Potatoes

22%

Electricity

28%

Beef

26%

Fruit

12%

Gas

38%

Fish

20%

Rent

11%

Petrol

12%

Butter

29%

Mortgage interest payments

8%

Rail fares

21%

Cheese

15%

Water

18%







4. Forecast inflation rates

The Treasury average of independent forecasts predicts that RPI inflation will rise by 1.1% in 2015, climb to 2.4% in 2016 and then accelerate to 3% or over every year between 2017 and 2018. The medium term forecast put the expected rates at the following levels.



Year

RPI forecast

2015

1.1

2016

2.4

2017

3.0

2018

3.2

2019

3.0

Source: HM Treasury Forecasts for the UK Economy, May 2015

If these rates turn out to be correct, the cost of living employees face will have grown by over 13% by the close of 2019, following the pattern set out in the graph below.

Given the government’s announcement in the July 2015 emergency budget of its intention to extend the 1% public sector pay cap for four years between 2016 and 2019, the potential impact of this inflation forecast on the value of an anerage public sector wage is shown below. At the end of the four year period, the average wage would have declined in value by just under £2,400 under this scenario.

5. Inflation for staff on low pay

In 2014, the Institute of Fiscal Studies published a study which found that, between 2008 and 2013, the lowest income fifth of households faced average annual inflation that was 1% higher than the highest income fifth.6

This conclusion was bolstered later in the same year, when the Office for National Statistics found that, among the lowest-spending households, average annual inflation ran 1% higher than the highest-spending households between 2003 and 20137. The cumulative result was that the prices of products purchased by the lowest-spending households grew by 45.5%, compared with just 31.2% for the highest-spending households.
6. Reason for comparing wages to RPI

UNISON believes that the Retail Prices Index (RPI) remains the most accurate measure of inflation faced by employees.



The most widely quoted figure for inflation in the media is the Consumer Prices Index, However, UNISON beleives that CPI consistently understates the real level of inflation for the following reasons:

  • CPI fails to adequately measure one of the main costs facing most households in the UK – housing. Almost two-thirds of housing in the UK is owner occupied, yet CPI almost entirely excludes the housing costs of people with a mortgage;

  • CPI is less targeted on the experiences of the working population than RPI, since CPI covers non working groups excluded by RPI – most notably pensioner households where 75% of income is derived from state pensions and benefits, the top 4% of households by income and tourists;

  • CPI is calculated using a flawed statistical technique that consistently under-estimates the actual cost of living rises faced by employees. The statistical arguments are set out exhaustively in the report “Consumer Prices in the UK” by former Treasury economic adviser Dr Mark Courtney, which is summarised here

For a more complete explanation of inflation indicators and arguments for countering any employer attempts to move away from RPI as the key reference point for pay bargaining, click here



1 Office for National Statistics, House Price Index, July 2015

2 Office for National Statistics, Trends in the UK Housing Market, 2014

3 LSL Property Services. Buy to Let Index Index, June 2015

4 HomeLet Rental Index, June 2015

5 Family & Childcare Trust, Childcare Costs Survey 2015

6 Institute of Fiscal Studies, IFS Green Budget 2014

7 Office for National Statistics, Variation in the inflation experience of UK households: 2003-2014, December 2014



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