With inflation once more in the news and Christmas around the corner, many parents are understandably concerned about covering family costs. Our latest findings show that the cost of bringing up a child has risen to at least £160,000, with increases in items such as childcare, food and domestic fuel pushing it ever higher.
Behind the headlines about the rising cost of living are some important issues about families’ experience of inflation. For someone like me, who began my career in a period of double-digit inflation, price increases of up to 5 per cent still sound relatively low. But it’s important to remember that up to the 2008 crash, there was an expectation, usually fulfilled, that incomes from both earnings and benefits would rise at least in line with prices. Austerity broke that link, with wage freezes in the recession followed by a freeze in working-age benefits between 2015 and 2019.
In an era when people often think about their income for next year from a zero-increase starting point, 5 per cent price rises sound much scarier than when they assumed there would be inflation-related uprating. Where inflation outstrips income growth even by a small amount, year on year, living standards are gradually eroded. Many employees will not be expecting 5 per cent pay rises next year. On the other hand, the end of the benefits freeze from 2020 means that at least this part of people’s income will increase by 3.1 per cent in April.
But does this signal a return to benefits rising with costs? After the automatic link between benefits and prices was broken, it is reasonable to wonder if we can be sure it has been permanently restored. One reason for this doubt is that the policy is not being consistently applied. There was good news in 2020 when local housing allowance, which sets the maximum rent contribution private tenants can get through housing benefit or universal credit, was restored to a level based on market rents. It had been eroded during the benefit freeze. However, in 2021, local housing allowance was once again frozen, at great cost to tenants whose rents are rising.
Another crucial issue is whether inflation based on the Consumer Prices Index (CPI) really does cover increases in living costs for low-income families. The problem is that a general inflation index is based on the spending pattern of an average family, whereas a family only able to afford essentials focuses their spending on items such as food, gas and electricity. With the cost of domestic fuel having risen by 23 per cent in the past year, this will bring the overall inflation rate for lower-income families well above the CPI. It’s time for policy makers to look more closely at how support for the worst-off families can be better protected, to avoid them becoming worse off still.