Poorest hit hardest by Thatcher's legacy

A few weeks ago I cut out an interesting table from the Metro newspaper - showing how the cost of essential items had risen in the past five years.

The table to the left shows quite clearly how the unavoidable cost of several essential items has risen well in advance of inflation.

Nearly four years ago, LEAP published some ground-breaking research on how inflation affected different income groups. The report Why Inflation is a class issue was published in conjunction the then newly formed Trade Union Co-ordinating Group. One of that group's unions - the PCS - has been on strike this week, with the decline in living standards one of the main issues in the dispute. Their general secretary, Mark Serwotka, told the media that his members had seen their incomes fall by 20% in the last five years - due to a combination of below inflation pay rises (including two years of pay freeze) and increased pension contributions (for a smaller pension at a later date).

For the poorest in society - those on low incomes or surviving on social security - increases in the essentials hit hardest. Our 2009 research found that the poorest 10% spend 67% of their income on essentials, compared to the richest 10% who spent only 29% on essential items. This massive differential is the legacy of the Thatcher years when inequality grew, reversing the equalising post-war consensus.

Many of the essentials - formerly publicly owned utilities - were privatised under Thatcher and now operate for the benefit of private shareholders, with only the lightest of regulatory touches. Their profiteering is evident in the table above, as households are hit by the rising costs of essentials like electricity, water, gas and telecommunications. The table above shows the reality for those facing a 1% cap on their benefits.

Likewise the spiralling costs of rents and house prices are rooted in the selling off and failure to replace council housing, the abolition of rent controls and tax breaks for buy-to-let merchants.

Whatever the origins though, the reality is that the poorer you are the harder you are hit by the seemingly unending rise in the cost of essential goods. In 2009 we called for a new measure of inflation - Essential Inflation - it is needed more now than ever, because the poorest are still being clobbered in a way that the headline CPI and RPI figures fail to reflect.

In a society as grossly unequal as ours, no single inflation measure can reflect the true picture for UK households.

Inflation is a class issue - the IFS confirms

If imitation is the sincerest form of flattery then the development of your idea is pretty satisfying too.

Yesterday the Institute for Fiscal Studies published a report 'The spending patterns and inflation experience of low-income households over the past decade'. In 2009 LEAP published 'Inflation Report 2009: why inflation is a class issue'. It showed that inflation was hitting the poorest hardest, and concluded that:

"the rate of inflation is not an objective single headline figure, but a subjective complex of forces which affect people very differently"

The IFS report showed that the poorest fifth of households faced an average annual inflation rate of 4.3% between 2008 and 2010, while the richest fifth only had a rate of 2.7%. This is because, as LEAP found, if the cost of essential goods (e.g. food, utility bills, housing) rise then the hardest hit will be the poorest who spend a higher proportion of their incomes on essential goods.

The IFS doesn't endorse our 'Essential Inflation' measure but does refer to 'Inflation inequality', which means "that poorer households will have fared worse over the period of the recession than poverty and inequality statistics that don't account for these differential inflation rates would suggest".

The report also finds that "Pensioners, and in particular those dependent on state benefits, experienced higher rates of inflation than non-pensioners". People on working age benefits have experienced an average rise of 4% in recent years, compared with 2.9% for those in work. This makes the change to CPI uprating for pensions and benefits all the more appalling.

Like our report in 2009, it's important that trade unions and other campaigners use these statistics to make the case for their causes: whether that's an end to pay freezes, uprating of benefits and pensions by RPI or wages (whichever is greater) or for nationalising or regulating the profiteering energy companies.

One person's inflation is another's deflation

There has always been a debate about the true level of inflation. Like the ruling ideas of each age, the ruling definition of inflation has always been that which best suits those in power: whether employers around a negotiating table or the Government setting benefit rises in Whitehall.

Inflation is calculated by assessing changes in the price of a ‘basket of consumer goods’ weighted proportionately to average spending patterns. The two most common measures, the Consumer Price Index (CPI) and the Retail Price Index (RPI) use slightly different ‘baskets’ to tell us the rate of inflation.

Inflation affects working class people in a variety of ways, as it directly or indirectly informs decisions on pay, benefits, pensions, student loan interest, council tax, etc.

However, 'inflation' is not a neutral term in a society where there are wide disparities in income and therefore spending patterns. The reality is that inflation affects people very differently in the UK, due to the high – and growing – levels of inequality.

The Office for National Statistics’ (ONS) Family Spending survey shows that the poorest 10% of households spend an average of £187.40 per week, compared with £1720.10 per week in the richest 10%. Therefore the richest spend in a week what it takes the poorest over two months to spend.

In this context, is a single inflation rate relevant? Different income groups will inevitably spend their incomes on different items, and individual items within the ‘basket of goods’ will contribute differently to the rate of inflation. LEAP was commissioned by the Trade Union Co-ordinating Group (TUCG) to specifically look at how inflation affects different income groups.

A good example of the disparity of spending patterns is on housing. The typical decile 1 (poorest) household spends 9.66% of total expenditure on rent payments, which for decile 10 (richest) drops to 0.86%. However, mortgage costs are respectively 3.47% and 9.34% - as, typically, the poorest rent and the richest buy their properties.

Other 'basic' living costs: bills (council tax, water, electricity, gas, communications), food and drink, clothing, and transport – were also calculated. These items form an underlying expenditure that is uniform across households since the goods are indispensible or mandatory – items that it is hard, if not impossible, for people to ‘do without’ or cut back on, even in times of recession.

Expenditure on the 'essentials' accounts for over two-thirds of the spend of the poorest households, but less than one-third of the wealthiest.

In reporting our findings, we have defined a new inflation measure called ‘Essential Inflation’ based on the changes in these essential goods that households.

With the exception of clothing and food and drink, these ‘essentials’ are all areas where the Government either sets or regulates costs. There is therefore a responsibility for Government to ensure that inflation does not disproportionately affect the poorest households.

In the year to February 2009, the ONS calculated the CPI measure of inflation to be 3.2%, and the RPI measure 0.0%. In the year to February 2009, ‘Essential Inflation’ was -0.82%. However, if we look at the ‘Essential Inflation’ rate broken down by decile, it was 1.92% for the poorest households and -3.21% for the richest.

In terms of ‘Essential Inflation’, the past year has seen a rise in the cost of living for the poorest households, yet a fall in the cost of living for the richest households. The data clearly shows that inflation is a class issue. In current pay negotiations, where pay freezes are being proposed across organisations, we should understand that a pay freeze is a real terms cut of nearly 2% in living standards for the poor, but a real terms increase for the richest.

The full LEAP Inflation Report: Why Inflation is a class issue is available as a free download. For a hard copy, please send a cheque for £2.50 payable to ‘Another World is Possible’ to LEAP, PO Box 2378, London, E5 9QU.

(a version of this article will appear in the November issue of Labour Briefing)

LEAP publishes Inflation report at TUC

LEAP has today published a major new research report on inflation.

Inflation Report 2009: why inflation is a class issue (free download) shows how in the past year inflation has disproportionately hit the poorest hardest.

The report, commissioned by the Trade Union Co-ordinating Group (TUCG) of eight trade unions, also argues that trades unions must fight for above inflation pay increases, especially for the lowest paid workers who have been hit hardest by inflation - as it is essential goods (which cost the poorest a higher proportion of their expenditure) that have had the highest rate of inflation in the last year.

The paper also proposes a new inflation measure: 'Essential Inflation', based on the inflation rate for the essential items that people are unable to cut back on.

Bob Crow, RMT General Secretary, said:

"It is clear from this important piece of research that the working class have taken by far and away the biggest hit in this recession.

"While pundits talk about falls in inflation, out there in the real world it's a day to day struggle for people to make ends meet as the cost of essentials continues to rise.

"Meanwhile, it's bonus time again in the casinos of the City of London. Those who got us into this mess have come out smiling while the workers who really make the economy tick have been hammered.

"RMT fights day after day against exactly this kind of injustice."

John McDonnell MP, TUCG Parliamentary Convenor, said:

"This paper demonstrates who has been hardest hit by the recession - and it's the lowest paid.

"This evidence will now shape trade unions' strategy in coming pay negotiations. Trade unions cannot be expected to stand back and allow the living standards of their members to be eroded when they've witnessed the return of the bankers' bonus culture."

Mark Serwotka, PCS General Secretary, said:

"Low paid workers in both the private and public sector are bearing the brunt of the recession. Hundreds of thousands of civil and public servants have experienced pay freezes leading to their pay being cut in real terms.

"PCS members who keep this country running know the true cost of inflation with 40% of staff who are helping people deal with recession getting no pay rise at all last year. This report lays bare the fact that it is the poorest in society who are hit by essential inflation."


The report's conclusions are:

• In current pay negotiations, where pay freezes are being proposed across organisations (e.g. British Airways) it is important to understand that a pay freeze is a real terms cut of nearly 2% in living standards for the poor, but a real terms increase for the richest. Unions are therefore correct to argue that low paid workers should not be treated the same in pay negotiations as senior management grades (even ignoring arguments about reducing existing pay differentials).


• It also means that unions representing the lowest paid workers should be calling for pay increases of at least 2% just to maintain living standards.


• Government must ensure that in areas it regulates – many of which are covered in the Essential Inflation measure – that rises are kept down so as not to disproportionately affect the poorest.


• The Government must also ask the Low Pay Commission to reconsider its recommendations that the National Minimum Wage (NMW) rates rise by only 1.1% in October 2009 – less than the rate of inflation for the second consecutive year. This would represent a decline in relative living standards for low paid workers, if there pay is increased only in line with the NMW uprating. Likewise upratings to social security benefits and the basic state pension this year must also be more generous.