Tuesday, December 05, 2006
Are the middle-classes inflation victims?
Posted by David Smith at 09:00 AM
Category: Thoughts and responses
The Daily Telegraph suggested yesterday that the middle-classes are experiencing rampant inflation and pensioners are even worse off. Middle-class inflation is apparently 5.8% and that of pensioners 8.9%. Is it? No. I think this is called tailoring the story to suit your readership. The claim was based on research by Capital Economics, which actually says in its report: "Contrary to the popular belief that middle-England has been hit hardest by recent price changes, middle-class families appear to have fared pretty well, with their inflation rate actually below the national average."
Only by adopting extreme, and therefore unrepresentative, assumptions, do they get to anything like the rates quoted by the Telegraph. The reality is that students are the worst victims of inflation - thanks to higher tuition fees - followed by young professionals (struggling with high rents) and low-income families. The poor are the worst victims of inflation. We have known for a long time from official figures that pensioners do experience higher inflation, of between 4.2% and 5.1% depending on size of household.
The government probably only has itself to blame for things like this. Gordon Brown should never have switched the Bank of England's target from RPIX - the retail price index excluding mortgage interest payments - to the CPI (consumer prices index).
Agreed: utter non-story. Have been discussing it with my Economics classes and working through it.
Any inflation index is by necessity merely an average and there are all sorts of differences between how an individual (and you can look at all sorts of groups - regional, gender etc.) will experience inflation. In fact, I'm amazed the Telegraph article didn't suggest "middle-classes in the South East suffer disproportionate inflation" - oh the horror!
Consumer bundles differ from consumer to consumer; the most interesting example I can think of comes from Sri Lanka where the inflation figure was artificially depressed by including a dated consumption bundle (I lived there in the mid 90s and seem to recall that the bundle dated from the late 1940s, though this may be incorrect).
Second, the middle-classes may at the furthest extreme experience such high inflation but this takes no account of two significant increases: in income and wealth.
I'll wager that the M/C have received salary increases that are above average for the UK and pretty close to the supposed 5.8% increase in inflation. Further, given that this group are almost all homeowners, what has happened to their wealth over the period?If you include other assets this effect is magnified.
Another example of shoddy economic journalism; of course, a headline of "Middle Classes significantly better-off than everyone else under Labour" wouldn't sell papers. But had they written about the change to CPI there might be marginally more of a story.
If I build a home using Plasma TVs, eat MP3 players and burn CD players for warmth then my inflation rate would be about 2.4%.
CPI is lies, damn lies!!
p.s. can anyone explain why TV license was removed from CPI just as the price inflated above inflation? surely most households HAVE to pay for this so its a good thing to have in there?
Mr. Watson, somewhat frighteningly for a teacher of economics, there's a gaping hole in the logic of your criticism. The RPI is not an average of all households. It excludes pensioners and the top 4% of households by income. Given the geographic distribution of income that skews towards London and the Southeast, a significant portion of households in that area, well above 4%, are excluded from the survey. Additionally, given that inflation, at least certainly inflation in housing prices, is concentrated in the precise area where households are under-represented, the reported RPI figures are most likely understated.
I'm afraid there's an even bigger hole in your logic. The reason the top 4% are excluded is that their inflation experience is likely to be untypical - a higher proportion spent on luxury goods and services and a much lower proportion of income spent on the things that have been rising most rapidly recently; food and energy.
If anything, RPI will tend to overstate inflation over time because it does not adapt rapidly enough for people responding to price signals and changing their spending behaviour.
Based on that logic, then why isn't everyone atypical? Does the 4th percentile really have a completely different basket of goods from the 5th percentile? There's a far greater difference in spending patterns between students and factory workers than there is between the 4th and 10th percentile of income. It still just comes down to cherry picking of the numbers.
No, not cherry-picking, but the ONS's best attempt to come up with an inflation measure that reflects the broad bulk of the population's experience. That means sampling in Sainsbury and Tesco, not Fortnum & Masons. It also means excluding pensioners, who tend to experience higher inflation - they have separate pensioner price indices (and should have their state pensions uprated in line with them rather than RPI). Almost invariably, the poor suffer most from inflation.