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Variation in the inflation experience of UK households: 2003-2014

Different rates of inflation experienced by different households in the UK between 2003 and 2014

The Consumer Prices Index (CPI) is the UK’s main macroeconomic measure of inflation. It is designed to show how the prices of the goods and services purchased by households in the UK change over time. However, because the spending patterns of individual households may be different to the household sector as a whole, the inflation experience of a specific group of households may differ. Some households may experience faster rates of price growth, others may experience lower rates of inflation. ONS has published an article which examines these inflation differentials in more detail.

The results of our analysis suggest that the price experience of different types of UK household has varied widely between 2003 and 2014. The largest differences are between households at the top and bottom of the expenditure distribution. Households that spend relatively little each month have experienced faster price growth than households who spend more. On our preferred measure, among the lowest-spending households experienced average annual inflation of 3.3% between 2003 and 2013, compared with 2.3% for among the highest spending households. These differences compound over this period, and consequently the prices of products purchased by the former group have risen by 45.5%, compared with just 31.2% for the latter.

Figure 1: Annual average inflation rates by equivalised expenditure decile, %, 2003-2013, %

Figure 1: Annual average inflation rates by equivalised expenditure decile, %, 2003-2013, %

Notes:

  1. Equivalised expenditure deciles (1 = lowest expenditure households, 10 = highest expenditure deciles).
  2. Averages presented are the compound average annual rates of change.

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Our analysis also indicates that the inflation experience of other groups has varied over this period. Differences in average inflation rates between income deciles tend to be smaller, but our results show that lower income households have experienced higher rates of price increase than high-income households between 2003 and 2014. The 2nd lowest income decile experienced average price growth of 2.7% over this period, which compares with 2.4% for the 7th income decile.  The cumulative impact of these differences is correspondingly smaller: the prices of the products purchased by among the lowest income deciles have risen by 39.2% between 2002 and 2014, compared with 31.4% for the 7th income decile.

The inflation experience of other sub-groups has also varied, but to a lesser degree. Retired households have experienced faster inflation relative to non-retired households. Households without children have also experienced faster rates of inflation than households with children. Supporting analysis suggests that housing costs are important. Groups with a greater incidence of mortgaged owner-occupiers have enjoyed lower rates of price increase due to lower mortgage interest payments. These results are summarised in Table 1.

Table 1: Average annual inflation rates for selected groups, %, 2003-2013

%
Group     Inflation
Decile of     1 2 9 10
Disposable Income   2.9 2.7 2.5 2.6
Expenditure   3.7 3.3 2.3 2.3
             
Households with Children     2.4  
Households without Children     2.7  
Retired Households       2.8  
Non-Retired Households     2.5  
‘Democratically-weighted’     2.9  
CPI         2.6  

Table source: Office for National Statistics

Table notes:

  1. Deciles of disposable income and expenditure are calculated on an equivalised basis, adjusting for the composition of the household. See Section 3 for more details.
  2. Equivalised income deciles (1 = lowest-income households, 10 = highest-income households)
  3. Equivalised expenditure deciles (1 = lowest-expenditure households, 10 = highest-expenditure households)
  4. Differences may not sum due to rounding.

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While the movements in some prices have influenced all groups, their importance as drivers of inflation has been substantially different. Our analysis provides evidence that retired households were strongly affected by the movements of energy and food prices, but much less by the increasing price of education (led by higher university tuition fees) and package holidays. Households with children, by contrast, were more affected by price changes for education, and less affected by movements in energy and transport costs. Comparing high and low expenditure groups, changes in the costs of utilities, food and drink account for most of the differences in inflation rates.

Our analysis also examines the degree of variation in rates of price increase within sub-groups. In particular, it concludes that the range of inflation outcomes for retired households is far broader than the range of inflation outcomes for non-retired households. Some retired households experienced broadly similar rates of price increase to the rest of the population. However, a minority experienced much faster rates of price increase, rising to an annual rate of more than 7% in 2008.

Finally, our analysis also examines how closely the CPI corresponds to the price experience of different sub-groups. Comparing the CPI with the inflation outturns for different groups, this paper concludes that the CPI is broadly representative of the price experience of households around two-thirds of the way up the expenditure distribution. An equivalent, ‘democratic’ price index – which weights the inflation experience of households equally, rather than drawing on household sector expenditure weights – is around 0.3 percentage points higher on average than the CPI over this period.

Categories: Economy, Prices, Output and Productivity, People and Places, Housing and Households, Households, Household Income and Expenditure, Price Indices and Inflation
Content from the Office for National Statistics.
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