14 Jun 2011

Poor hit hardest by 4.5 per cent inflation rate

Official figures reveal that May’s inflation rate remains at a two and half year high, as research shows that the poorest have been worst hit by rising food and drink costs.

Official figures reveal that Mays inflation rate remains at a two and half year high, as research shows that the poorest have been worst hit by rising food and drink costs.

The government’s preferred measure of inflation, the Consumer Prices Index, stayed at 4.5 per cent in May, well above the Bank of England’s 2 per cent target. The Retail Prices Index, which includes housing costs, was unchanged at 5.3 per cent.

This means that the inflation rate has been above the target figure set by the Bank of England of 2 per cent for the last 18 months.

The cost of food in May increased by 1.3 per cent, with the cost of fruit particularly on the rise.

Alcohol and tobacco prices saw increases of 0.7 per cent despite a fall in the cost of whisky and vodka. This means alcohol and tobacco costs are 9.8 per cent higher than this time last year, the fastest rate of increase since records began in 1997.

However these costs were offset by a decline in travel costs during May as air and ferry travel ticket prices fell by 11 per cent and 14 per cent respectively after the Easter period.

The food and drink price rises, in addition to escalating energy costs are hitting the poor and vulnerable particularly hard.

Inflation graphic

Research released by the Institute for Fiscal Studies and Consumer Focus, shows that low-income households spend twice as much of their budget on energy and food bills than richer households.

The poorest fifth of homes spend 9.4 per cent of their budget on energy costs, while the richest fifth of homes spent only 4.4 per cent of their budget on the same bills.

The same low-income homes set aside 20 per cent of their budget for food bills as opposed to the 10.1 per cent budgeted by the richer homes.

Pensioners and people who are dependent on benefits have also been hit hard by rises to the cost of living, as they spend proportionately more of their income on food and fuel.

The average pensioner who is dependent on benefits has seen their inflation rate increase by 4.6 per cent a year between 2008 and 2010, while a non-benefit-dependent pensioner has seen a 4.3 per cent annual rate of inflation.

Likewise, people of working age who are dependent on benefits have seen the cost of the goods and services they use rise by about 4 per cent a year during the same period, significantly higher than the annual rises of 2.9 cent faced by people of working age who do not rely on benefits.

William Baker, fuel poverty expert at Consumer Focus, which commissioned the research, said: “The research shows low-income households spend more than twice as much of their budget on energy when compared to the highest income groups.

“This means they live in colder houses, face unmanageable levels of debt and may even be forced to make budgeting decisions as stark as whether to heat or eat.

“Inflation rates for fuel are already higher than for other goods, and double digit price increases will push millions more on low incomes into fuel poverty.

In the last 10 years figures reveal that food prices have risen in total by 41 per cent.

Today’s inflation figures will increase calls for the Bank of England to raise interest rates from their current record low of 0.5 per cent. However Governor Sir Mervyn King has already said he expects inflation to peak at 5 per cent before dipping later this year.

Some economists predict that inflation could rise even beyond the 5 per cent mark this year.

Jonathan Loynes, an economist at Capital Economics, believes that further rises in food prices and gas and electricity bills will “take the headline inflation rate above 5 per cent and perhaps even above 5.5 per cent by late summer”.

However, Loynes thinks inflation will fall back sharply next year as the impact of the VAT rise falls away. He called on the Bank of England to hold its nerve by not raising interest rates.

Many economists do not expect interest rates to rise before November at the earliest.