Professor Donald Hirsch has recently worked with the Joseph Rowntree Foundation on the Minimum Income Standard. That research used the English Housing Survey among other datasets.
In this post, he examines how current measures for inflation don’t always reflect costs of living.
Over the past ten years, median household income has risen by about 28%, while the Consumer Prices Index (CPI) shows inflation running at 25%. So while living standards have stagnated, they at least appear to be up a bit on their pre-recession level.
Such statistics give us a broad picture of how households are doing economically. Of course they don’t show the wide differences in the fortunes of different groups.
It’s often pointed out that if living standards aren’t changing on average, many people are bound to be getting worse off – and this stagnation has lasted far longer than in living memory, other than for nonagenarians who lived through the 1930s. Moreover, those likely to be on the wrong side of this average include more or less anyone of working age relying on means-tested benefits and tax credits, and their families, since these income sources have risen far more slowly than average prices.
However, the striking finding of our roundup of a decade of our evidence on the Minimum Income Standard, published today, is that minimum costs have in fact risen by far more than the headline CPI figures suggest – making the lag in income much worse than it may first appear.
Our approach of looking closely at what comprises a minimum family budget, informed by what members of the public say you need, tells us a number of things that you simply can’t get from the CPI, which compares prices of a wide range of goods and services weighted by what households spend on average. Several of these factors have caused the minimum to rise faster than CPI, although others have had the reverse influence.
By weighting different price increases to reflect an average household budget, CPI may not show what is happening to the cost of an essential minimum.
The cost of buying a new car has risen 20% since 2008, but the cost of travelling by bus by 68%. Both of these contribute to the CPI calculation, but only the bus fares to a minimum budget, since you don’t need to own a new car. The cost of gas, electricity and a minimum food budget have also risen far faster than the official inflation rate.
What you need to buy can be influenced by changes in society.
Most obviously, smartphones, laptops and broadband are now on the shopping list whereas a decade ago it was more typically a landline telephone and very limited use of a pay as you go mobile, with computers and the internet considered inessential for most household types.
You’d think this would add to the overall budget cost, but actually the reverse is true. It’s hard to forget that ten years ago we were still paying considerable charges for landline phone calls, whereas today most of our communications are free at point of use, using devices that can be very inexpensive if you don’t go for anything fancy.
In sum, households pay less now for a minimum communications package than the one specified in 2008, which did far less.
We’ve identified ways in which government influences not just people’s incomes but also their minimum costs.
One way is in the quality and extent of public provision. Reducing subsidies for bus travel not only puts its price up but also reduces the degree to which it meets travel needs, as services deteriorate. This means households need to supplement buses more with taxi journeys, adding greatly to their costs. Families with children, who no longer believe you can do without a car outside London, have an especially high additional cost compared to 2008, when they thought relying on public transport was sufficient as a minimum.
Another way governments influence things is by setting standards themselves – such as saying people should eat five fruit or vegetables a day, that early childhood learning is essential and that children should learn to swim. This influences what member of the public think of as a minimum set of requirements, without necessarily making such things more affordable.
While attitudes to what kinds of things you need have proved pretty stable, specification of how much of it is necessary can alter with social attitudes over time.
Parents today have lower overall specifications about how much a family needs to eat out than they did before the recession – they still think that being able to do so is important for participating in society, but the minimum frequency for meeting this is once a quarter, down from once a month.
Conversely, pensioners appear to be putting greater emphasis on social participation, and have become more like working age households in how they specify this (their eating out budgets have risen slightly, converging with those of working age). They talk a lot to us about the importance of being part of society and not being isolated, and any ‘mustn’t grumble’ attitude of the generation who experienced rationing is not heard in the groups of pensioners we talk to today.
Over the past decade there have been important changes influencing not just what items people need to buy, but also how they buy them, which can influence costs.
Online shopping can make it easier to access discounted goods, to make price comparisons and to arrange deliveries if you haven’t got a car. This is starting to affect MIS budgets in significant ways, such as assuming a certain amount of shopping around for home energy deals.
We need to be careful about how we make such assumptions, because many people have neither the time nor the expertise to optimise their costs in complex markets. But the MIS method allows us to explore how we should reflect such social change in the way we price things: members of the public say how much ‘shopping around’ one can reasonably assume. I reckon this is likely to be one of the big issues as we go into the second decade of MIS.
But don’t take my word for it.
We’ve learned in the first decade that we can’t second-guess the changes that emerge as part of a public consensus, let alone those that will come in the future. That’s why regular consultation with the public will continue to be at the core of MIS.
If you want to know what they identify as essential in 2028, just watch this space…
Donald Hirsch is the Director of the Centre for Research in Social Policy at Loughborough University and has had a close association with the Joseph Rowntree Foundation since the mid 1990s, and between 1998 and 2008 was its Poverty Adviser.
Previously, he had been a journalist on magazines including The Economist, before moving to Paris to carry out international studies of education for the Organisation for Economic Co-operation and Development (OECD).
This post was originally published on the Centre for Research into Social Policy’s website and is reproduced by kind permission of the author.