Higher cost of basic goods is driving up inflation

Inflation was unchanged in May at 4.5 per cent according to figures released today (pdf) by the Office for National Statistics. This is the 17th consecutive month that inflation has exceeded its target rate of 2% by more than 1 percentage point. You have to go back 18 months, to November 2009, for the last time inflation was close to the target rate (when it was 1.9%).

Even then, inflation was being held down by the temporary cut in VAT implemented by the last government. VAT was cut from 17½% to 15% in December 2008, so the November 2009 inflation number was the last one to benefit from a favourable annual comparison of VAT rates.

Subsequently, VAT was increased back up to 17½% in January 2010 and then to 20% in January 2011. ONS statisticians reckon the VAT hikes added 0.40 percentage points to inflation in January 2010 and 0.76 percentage points in January 2011.

So, even without the effect of the VAT hike, inflation in the UK would be 3.7% – still higher than in most comparable countries.

Over this period since November 2009, inflation has increased in 11 of the 12 sub-categories detailed by the ONS. The exception is recreation and culture, where it has fallen from 2.0% to 0.9% thanks to continued deflation in the prices of audio-visual equipment.

Inflation in the cost of education is little changed (up from 5.2% to 5.3% over this period).

The biggest increases in inflation have been in four areas: food and non-alcoholic drinks; alcohol and tobacco; clothing and footwear; and housing costs. Together these account for 1.9 percentage points of the 2.6 percentage point increase in inflation since November 2009 (although they only make up 35% of the basket of goods and services that comprise the consumer price index).

This is despite the fact that many food items and children’s clothes are exempt from VAT and VAT on household fuel is at the special rate of 5%, which has not been changed. In other words, higher inflation in the UK over the last 18 months is largely the result of big increases in inflation in the three most basic items of living: food, clothing and shelter.

This adds weight to the findings of a recent report (pdf) from the Institute for Fiscal Studies which argued that inflation has been higher for low-income households, and particularly low-income households headed by older people, in recent years.

To the extent that inflation is responsible for squeezing the living standards in the UK, it is the poorest households that are being squeezed the most.