Inflation hits richest and poorest hardest
20 November 2012
By Tom Robinson, PwC Economist, and John Hawksworth, Chief Economist
Media attention focuses on the headline inflation rate, which rose by a surprisingly large amount from 2.2% in September to 2.7% in October. But it is also interesting to ask how this inflation rate varies across households in different income groups – are prices rising faster for the poor or the rich?
Our analysis of this issue, as featured in the press recently, shows that the highest inflation rates over the year to October were faced by the richest and poorest income groups. For the richest 10% of households, this was driven by the rise in university tuition fees in October. But excluding this exceptional rise in educational costs, the poorest households faced the highest underlying inflation rate due to increased food prices and domestic water bills.
We used data on household spending patterns by income group from the 2011 Family Spending survey to assess how inflation rates differ between income deciles (i.e. ranging from the poorest 10% to the richest 10% of households). Figure 1 summarises these results for the overall Consumer Price Index (CPI) inflation rate in the year to October 2012.
Our analysis suggests that the highest inflation rate of nearly 3% was experienced by the richest 10% of households due to their particularly high exposure to the exceptional rise in tuition fees this October. Education accounts for over 4% of total household spending by this group compared to only around 1% of spending on average for the poorest 20% of households.
However, the second highest inflation rate of 2.8% was experienced by the poorest 10% of households, who are most exposed to recent rises in the price of food and higher domestic water bills since April.
Given the exceptional nature of the rise in tuition fees, which pushed up total education costs by a record 19.1% between September and October, it is reasonable also to consider underlying inflation rates excluding education costs, as shown in Figure 2.
Once education is stripped out, the underlying inflation rate falls back markedly to around 2.3%, and a clearer pattern emerges with the lowest income groups facing the highest inflation rates due to larger price increases for essential items such as food and water. The poorest 10% of households face an underlying inflation rate of around 2.5%, as against just 2.1% for the richest 10% of households, who spend a much lower proportion of their income on these essential items.
This continues the pattern of most recent years in which rises in global commodity prices for essential products have had a proportionately greater impact on the poorest households, intensifying the squeeze on their real incomes from the economic downturn. At the moment, these differentials in inflation by income group are not particularly large (e.g. compared the situation to early 2008). But they could widen again if global growth accelerates again in 2013-14, which will tend to push up prices of food, energy, metals and other basic products.
John Hawksworth | Tel: +44 (0)20 7213 1650
Tom Robinson | Tel: +44 (0)20 7213 4302