Saturday, 15 November 2014 10:44

Poverty, inflation and the cost of living

Written by  Ruralcity Media
Poverty, inflation and the cost of living

COST of living and inflation levels can differ for population groups, including the rural poor, finds Brian Wilson.

The Joseph Rowntree Foundation has released its findings from two linked pieces of research, one on Poverty and the Cost of Living by the New Policy Institute, the other on Measuring Poverty When Inflation Varies Across Households by the Institute for Fiscal Studies. Both of these have a fairly obvious rural dimension.

Most discussions of poverty are based upon incomes and apply a standard threshold to define those in poverty. In reality this is simplistic. The cost of living varies for different individuals, households and groups. Similarly, rises in the cost of living – inflation – affect some more than others and so might take people into or out of poverty.

Low income households spend a greater proportion of their income on essential goods and services compared with better-off households. As such, they can experience differing inflation rates. In recent years low income households have been subject to higher than average inflation, although historically this has not always been the case.

This idea has been described as the 'poverty premium', where the poor pay more because (for example) they use prepayment meters for home heating or lack banking facilities for direct debits or have no online access to discounted services.

Moreover, not all low income households share the same circumstances. Some face special or 'enhanced costs', a pertinent example being those who live in rural areas and who are often faced with extra transport costs and higher heating bills. Low income groups are less likely to be active consumers who shop around and switch suppliers, in part because they have less scope to do so.

This is relevant stuff, given the strength of evidence about rural travel needs, rural housing costs, rural fuel poverty and rural broadband internet access. The Rural Services Network's own State of Rural Public Services 2013 report noted that residents in smaller rural settlements travel 45% miles more than the national average and that car ownership is relatively high even among poor rural households. One could add to that higher forecourt prices in rural areas for petrol and diesel.

As noted above, inflation does not affect all households equally and conventional analyses, assuming a common inflation rate, may therefore under or over estimate its effect on individual household living standards. This assumption can distort findings about trends in poverty.

In the eleven years from 2002/03 to 2013/014 the poorest fifth of households experienced an average annual inflation rate (or RPI) of 3.4%. This figure compares with 3.1% for all households and 3.0% for the most affluent fifth. Cumulatively, over the eleven year stretch this means that prices rose 50% for the poorest fifth and 43% for the affluent fifth.

The research finds that income levels for the poorest households were reasonably protected during the post-2008 recession. However, they were hit harder than most by the differential impact from inflation. It could be that this will prove to be short term, since there have been periods when the poor have benefitted from less than average inflation.

Of course the cost of essential goods, such as food stuffs and energy raw materials, is often a result of (increasingly globalised) market factors.

However, the research is quick to point out that policy makers have various levers at their disposal which could ease the burden on low income households. Consumption taxes such as VAT, the regulation of competitive markets and direct payments (e.g. for childcare) are all examples.

It is a policy choice that there is reduced rate VAT on energy bills. Various regulators are now pressing commercial service providers to assist their most vulnerable customers. It was a great shame, therefore, to learn recently that well-intended help through the Energy Company Obligation (or ECO) has largely overlooked the rural poor.

Universal Service Obligations could be seen as another way in which public policy protects low income groups in rural areas. Hence, why the Rural Services Network expressed its anxiety the obligation on Royal Mail, to provide a daily postal collection at a UK-wide price, could be undermined if competitors are simply allowed to cherry pick urban markets.

One of the research reports floats the idea of using group-specific inflation rates to uprate state benefits, which it says would prove cost-neutral over the longer term. Higher benefits for rural households? Now that is a radical thought.

This article was written by Brian Wilson whose consultancy, Brian Wilson Associates, can be contacted at This email address is being protected from spambots. You need JavaScript enabled to view it.. Brian also acts as the RSN Research Director.

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