Newspaper headlines that talk of zero inflation are masking two crucial facts – prices for many essential goods are rising fast, and the poor are paying a bigger proportion of their incomes for them.
While the Retail Price Index (RPI) – which includes some housing costs – has dropped to zero percent, rises in the cost of food have pushed up the government’s preferred inflation figure, the Consumer Price Index (CPI). It now stands at 3.2 percent.
RPI is used in wage negotiations and for pension increases. It dropped more than CPI because mortgage rates have dropped with the housing crisis.
The official inflation rate is calculated on a basket of 650 goods. Some of the items can distort the figures. Last year champagne was added in. This week imported cheddar has been replaced in the basket with Parmesan.
But the real problem is the weight given to different items.
Utility bills are given similar importance to luxury goods. And food costs make up only a tenth of the basket. Inflation for those who spend heavily on luxury goods, like private school fees, may be falling. But working class people spend disproportionately more of their income on food.
According to the RPI, food is 11.3 percent more expensive than a year ago and utility bills 22.3 percent higher.
The underlying reality behind the figures is that, while wages are stagnant, we are paying more just to stand still.