Soaring inflation hurts the poor more, says IFS

Amid calls for interest rate rises, new research shows the UK's rising inflation has hit poorer families disproportionately hard
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The Independent Online

Inflation has hit poorer families much harder than the rich, the latest research shows – and the trend is set to deteriorate. The independent Institute for Fiscal Studies says that for a decade the pattern of price rises has meant that the least well-off families, especially pensioners, have been hit hardest by rising prices.

The revelation comes as Scottish Power and other firms have signalled rises of 10 to 15 per cent in gas and electricity prices this autumn, adding to an already intense squeeze on households caused by tax hikes, benefit cuts and minuscule pay rises.

The drought in eastern England, political tensions in the Middle East and burgeoning demand from China are all set to keep the price of food, oil and other commodities high.

The latest inflation figures this morning are expected to stabilise around the 4.5 per cent annual rate seen in April; but a further spike to 5 or 6 per cent by this autumn is likely. It will put inflation at a 20-year high. But families in the poorest fifth of society are bearing the brunt of this. They faced anaverage annual inflation rate of 4.3 per cent between 2008 and 2010, say the IFS, whilst the richest fifth experienced a rate of just 2.7 per cent a year over the same period.

While basic, unavoidable essentials such as food, energy and clothing have spiralled for ordinary families, the IFS argues that the reduction in interest rates and mortgage bills since therecession began has disproportionately benefited the well-heeled, those able to afford expensive homes with large mortgages. Richer households also spend more on "leisure goods" onaverage. The prices of these "fell quite dramatically" from 2000 onwards.

"Over the past few years relative price changes have tended to hit poorer and older households harder," said research economist Peter Levell. "It does mean that poorer households will have fared worse over the recession than poverty and inequality statistics that don't account for these differential inflation rates would suggest."

Although domestic energy prices more than doubled between 2000 and 2010 the trend is still upwards. TheDepartment of Energy projects that real domestic fuel prices will increase as a result of trends in world commodity prices and Government policies for increased use of renewable energy and reducing carbon emissions.

The IFS said: "Rises in gas and electricity prices have played a particularly important role. To take one year as an example, in 2008, the RPI rose by 4 per cent, but fuel prices rose by 18.9 per cent."

Poorer pensioner households are also more likely to see the value of their savings destroyed by inflation; but the wealthy with large mortgage debts would welcome having those eroded in real terms by inflation.

The IFS report came as a leading Bank of England policymaker called again for an immediate hike in interest rates and warned the Bank that "for inflation to be brought back to target, interest rates must be expected to rise". Martin Weale, who joined the Monetary Policy Committee as an external appointment last year, has since January voted for a 25 basis points rise in interest rates, from their 315-year low of 0.5 per cent.

He said the Bank must pre-empt any hardening inflationary expectations and behaviour, even though there is scant evidence of it now.