Inflation rate higher for rich, study finds

THE RICHEST households have faced bigger increases in their 'real' cost of living than official inflation figures suggest, according to a study published yesterday. The poorest have fared better.

The study, from the Institute of Fiscal Studies and the Joseph Rowntree Foundation, says inflation in the 'real economy' can vary by as much as 3 percentage points, depending on the income of the consumer.

In spite of fears expressed by poverty pressure groups, the move from direct to indirect taxes since 1979 has had a greater impact on the rich, it suggests. The main reason is that the poor spend more of their income on necessities such as food, fuel and clothing, the relative price of which fell during the 1980s.

'Luxuries' such as eating out and entertainment have grown relatively more expensive. Better-off households have been spending much more in these areas, particularly on entertainment.

The report says VAT zero- rating of items such as food, fuel, public transport and children's clothing, which are important items of spending for poorer households, means that the burden of the tax has fallen most heavily on the better-off. However, the cost-of- living of rich and poor has varied since 1979. During the early 1980s, for example, the poorest 10 per cent faced a real inflation higher than the retail price index (RPI).

By 1992, the picture had changed: the richest 10 per cent faced inflation 2.46 per cent higher than average; for the poorest 10 per cent, the figure was 0.32 per cent lower.

The author, Ian Crawford, says that linking social security benefits to the RPI may leave poor households short of cash for periods of one or two years: benefits should be more closely tailored to the recipient's cost of living.

Although the study indicates that the increase in real income inequality is less than statistics have suggested,'this does not imply that it is good to be poor. The differences are small and the welfare effects of low income massively outweigh the effects of a slightly lower-than-average cost of living.'

When capital gains and losses on housing are taken into account, poorer households appear to have done worse, because many elderly poor people own their homes and have felt the full effect of falling house prices.