Even if Ed Miliband hadn’t identified the “cost of living crisis” as a potent political weapon, I had already planned to resume tracking the price of a basket of household essentials. With the blessing of my former colleagues at Tullett Prebon, publication of the TM UK Essentials Index will proceed on a monthly basis, starting with the November issue.
To get the new report (and its successors), please sign up using the contact form which you can find at www.surplusenergyeconomics.com.
The basic story, of course, is a familiar one. Between 2007 and 2012, the price of essentials increased by +33%, a far bigger increase than CPI inflation (+18%), let alone average wages (+10%). If you measure the average wage against essentials alone, its purchasing power declined by 17% between those years. This trend is continuing – as of October, the cost of essentials is rising at an annual rate of 3.0%, well ahead of CPI (2.2%).
The current rate of increase is a marked improvement over recent years – the cost of essentials rose by 8.4% in 2008, 3.8% in 2009, 5.7% in 2010, 7.8% in 2011 and 3.7% last year.
This is pretty cold comfort, however, for two main reasons. First, wage growth is extremely low at the moment (0.8%). Second, the soaring cost of essentials is a cumulative process – the latest figure makes essentials 37% more expensive now than they were in 2007, whilst wages are only 11% higher.
As far as I can discover, this is a deeper and more protracted deterioration in living standards than anything that we’ve experienced before, certainly in living memory.
So far as I’m aware, Ed Miliband isn’t aware of the TM UK Essentials Index, but it certainly seems to reinforce his point about the “cost of living crisis”. Actually, the blame for this process of impoverishment isn’t as clear-cut as you might think, since things were at least as bad between 2007 and 2010, under Labour, as they have been since then under the Coalition. This said, blaming the slump in living standards on events before 2010 isn’t going to cut much ice with voters in 2015.
My report identifies four main causes behind the escalating cost of essentials. First, devaluation has obviously increased the sterling cost of commodities (and inputs) such as energy and food, which are priced on international markets. There’s not much that any British government can do about this
Second, there has been a severe squeeze on wages, which is, in part anyway, the price that has been paid for avoiding an escalation in unemployment. There’s not too much that the government can do about this, either.
But the tightening in international energy markets is not something that the government should be complacent about. My November Essentials report contains a chart of UK energy production and demand which is truly scary. We really do need to be investing in British-owned nuclear power generation, as well as increasing storage capacity so that we can buy more of our gas imports in the summer, when they are cheaper. We also ought to be developing waste-to-heat conversion as an urgent priority.
Lastly, some of the big “essentials” sectors – including the supply of energy, water and food – suffer from a woeful lack of competition. Ideally, we would ensure that no company has greater than, say, a 10% share of any of these markets. Competition is the most powerful economic force favouring the customer, and it really needs to be unleashed in the interests of hard-pressed working households.