UK households are getting squeezed

By Leith van Onselen

Tullet Preborn recently released its new essentials index, which attempts to measure the real cost of living in the UK. The report paints a grim picture for UK households, which appear to be getting squeezed by falling real incomes and rising living costs.

Below are the key charts and analysis from the report, which is provided in full below.

First, real (inflation-adjusted) incomes have been declining since the onset of the Global Financial Crisis (GFC) in 2008:

Between 2007 and 2012, growth of 10% in average nominal wages was far exceeded by cumulative CPI inflation of 17%, leaving real incomes 6.3% lower in 2012 than they were in 2007. In 2007, wage-earners were 13% better off, in real terms, than they had been in 2002. Since 2007, about half of that previous gain has been lost.

This is bad enough in itself, of course, and becomes even worse if high levels of household indebtedness – and increases in direct taxation – are taken into account. But we believe that there is another, highly significant factor to be considered. That factor is the above-CPI rate at which the prices of non-discretionary, essential purchases (including food and energy) have risen. The implications are, of course, that consumers’ capacity for discretionary spending has been eroded even more severely than data for real incomes might suggest.

Indicators of inflation, set out in figs. 3 and 4, help identify where some of the problems lie. Between 2002 and 2012, cumulative inflation of 29%, as measured by CPI, was far exceeded by increases in the prices of essentials such as gas and electricity (+142%), (+108%), fuel (+71%) and food (+43%).

As well as exceeding CPI inflation, the prices of these essentials also rose by more than nominal average wages (+36%). This trend has been even more pronounced since 2007. Between 2007 and 2012, cumulative growth in nominal wages (of 10%) has been exceeded not only by CPI inflation (+17%) but by far bigger increases in the prices of essentials such as gas and electricity (+46%), vehicle tax and insurance (+88%), fuel (+56%) and food (+30%).

In short, inflation in the costs of essentials, which was already squeezing discretionary spending capabilities before 2007, has since compounded the effect of a widening in the differential between nominal wages and general (CPI) inflation.

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Tullet Prebon – Measuring the Real Cost of Living (Feb 2013)

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Comments

  1. This is all going to Plan! A fall in real wages, whilst nominal wages rise, keeps households repaying debt and cutting back on discretionary spending. The casualty, of course, is the standard of living, but Real Debt falls….Voila!

    • “…..A fall in real wages, whilst nominal wages rise, keeps households repaying debt….”

      What, while house prices continue to rise?

      Urban land prices are one of the main underlying problems. This cost filters through to almost everything.

      The same pig-headed urban planning also causes increased congestion, losses agglomeration efficiencies, and losses of productivity.

  2. It was pretty much the case when I left there 2 years ago. Wages falling, cost of living increasing by lot more than the fiddled CPI figure.

    What’s worse is that a large component of the price rises have been deliberately inflicted by the state on it’s own population by following so called ‘green’ policies which have needlessly driven up the price of power, fuel with consequent knock on effect throughout the food supply chain.

    http://www.eureferendum.com/blogview.aspx?blogno=83691

    Perpetuated by self selecting, ego driven, rent seeking metropolitan elites in the UK and Brussels, who do not have to live with the consequence of their actions.

    • And where in the figures is the grossly inflated cost of housing? Especially for those who have bought their first home recently, or have yet to do so?

    • From the article linked by Joe Blow:

      “…..There is no better symbol of madness than turning one of the biggest and most efficiently run coal-fired power stations into a world of eco-lunacy as it embarks on a £700 million switch away from burning coal in its six colossal boilers to devour millions of tons a year of wood chips instead.

      Most of these chips will come from trees felled in forests covering a staggering 4,600 square miles in the USA, from where they will be shipped 3,000 miles across the Atlantic to Britain, to fulfil the insane pursuit of reducing CO2 emissions.

      Unlike coal, which is now demonised as a filthy, planet-threatening pollutant, biomass is considered ‘sustainable’, because it supposedly only returns back to the atmosphere the amount of CO2 it drew out of the air while the original tree it came from was growing…..”

      And Greenpeace still opposes the use of timber in buildings…….!!!!!!

      • Unlike coal, which is now demonised as a filthy, planet-threatening pollutant, biomass is considered ‘sustainable’, because it supposedly only returns back to the atmosphere the amount of CO2 it drew out of the air while the original tree it came from was growing

        What about the fuel the ship uses for transport it 3,000 miles?

        • PPS, I calculate that to supply all the UK’s electricity needs from wood would require an area approximately 2.5 times the area of the UK.

        • What about the fuel the ship uses to transport coal?

          The concept of burning biomass being carbon-neutral has been around for decades. If you chop down a tree and burn it, you can grow it back a less than 10 years. When you burn coal you are releasing carbon that has been sequestered in the Earth’s crust for millions of years.

          I can’t say I feel 100% comfortable with the idea burning biomass — because its carbon neutrality depends completely on whether the biomass is regrown — but its certainly better than burning coal.

          • That’s not a sound logic basis.

            Burn wood, so (future wood) wood will absorb it yeah?

            But burn coal, which is less carbon dense than wood, so (future) wood can absorb it is off the radar?

            Are plants selective about which source of carbon dioxide they absorb?

          • drsmithyMEMBER

            Burn wood, so (future wood) wood will absorb it yeah?
            No, burn wood because the carbon in it was absorbed from the atmosphere in a recent timeframe.

            Burn coal and you’re releasing additional carbon into the atmosphere that’s be “out of the cycle” for millennia.

          • Rusty, think of fossil fuels like money printing or resource gluts. By adding to the available pool you are causing distortions extraneous to the cycle itself. Trees are within the cycle and make no distinction on the source of CO2 but there is a limit on how much carbon they can sequester in their tissues due to: available area for growth, water, temperature, etc. By burning fossil fuels you are effectively adding carbon to the total pool, whereas burning biomass would simply recycle it (increased money/carbon velocity). Biomass is not going to be a significant electricity source for the UK (densely populated with poor forestry prospects), but for areas with wood resources and where the heat can be used directly as well it will have an impact. For the next half century I see no choice but rolling out III and IV gen nuclear reactors and investing in more novel designs (thorium and fast breeders) to get every watt out of existing fissible material. Maybe at the end of this century our grandkids will see fussion reactors.

          • You two are talking nonsense.

            That is completely devoid of socratic thgouth. It’s past form of natural sequestration is irrelevant.

            What is being asked now is that we humans are seeking to release energy by the combustion of carbon.

            We can either burn coal, or we can burn wood. Some cyclical notion about past time frmes again is irrelevant.

            What is important is

            i) How much carbon dioxide is released. As coal is less dense carbon dense, it releases more carbon dioxide in the air for the same energy relased.

            ii) the capacity of natural carbon sinks to absorb it from the air.

            Technically you’re impairing this latter function as you’re cuting down the short time frame vehicles.

            Just because carbon has been sequestrated in the past and found itself sunk as coal is irrelevant.

            By adding to the available pool you are causing distortions extraneous to the cycle itself. Trees are within the cycle and make no distinction on the source of CO2

            No they are not, this is some sort of junk cience rationalisation hamster.

            Once it is a tree, it is out of the CO2 cycle, it has taken the shape as a carbon sink.

            By burning fossil fuels you are effectively adding carbon to the total pool,

            No you’re not, you’ve released an alternative form of carbon. Burning coal means your forego the burning of wood.

            Burning coal releases less carbon into the atmosphere than what would occur to burb sufficient wood to provide the same amount of energy.

            whereas burning biomass would simply recycle it

            The same can be argued with coal.

            Coal burning releases Co2 intot he atmosphere, and it returns as a carbon sink via (moree) trees.

            It doesn’t have to return as coal to be sunk carbon.

          • It’s past form of natural sequestration is irrelevant.

            If you believe no distinction need be made between timescales that produce coal and timescales that produce trees, then yes, that’s true.

          • If you believe no distinction need be made between timescales that produce coal and timescales that produce trees, then yes, that’s true.

            Why is the production timeframe relevant?

            The decision matrix is based on a snapshot of now.

            We need energy, we need to burn a carbon for to acquire it.

            The choice is trees or coal, they will both produce emmisions. Formation time is irrelevant here.

            The levels of emissions will be greater for burning wood. Formation time is irrelevant here.

            Prevailing trees, amongst other things, are required to naturally sequestrate the emissionsove time. Formation time is irrelevant here.

            Leaving coal in the ground makes no material difference in the marginal rate of future sequestration, it is just a way marker of prehistoric sequestration, nor is it material in the future sequestration demands as our energy needs are contemporary.

            So again, where does this use biomass become apparent as a ‘natural cycle’?

            I’ll reiterate.

            We unlock energy by releasing CO2 into the atmosphere. It’s form is irrelevant because the use of one eliminates the need to use the other. They are competing outcomes.

            The main difference is that coal is less carbon dense.

          • And as Jesse Ausubel has been pointing out for years, humanity has steadily progressed to less and less “carbon dense” sources of energy. On current trajectory, he has been saying, we will have a carbon-free global economy in a few more decades. At the very least, we will have a much less carbon-intensive one.

            I recommend his heavily science-based writings.

          • drsmithyMEMBER

            Why is the production timeframe relevant?

            Because a timescale relevant to humanity (10s to 1000s of years) on a geological timescale doesn’t even qualify as a rounding error.

      • On that basis, I suppose someone will now argue that burning coal is “sustainable” because it only returns back to the atmosphere the amount of CO2 the ferns drew out of the air back in the Carboniferous.

      • PS, I thought people in the UK had worked out that burning wood for fuel was not sustainable back in the time of Elizabeth I, when wood became scarce and people had to resort to coal (sea coal in those days).

  3. The real question that I’m sure all the UK population want to know the answer to is why so many things have risen in price far beyond the rise in wages. (The culprit as far as energy prices is clear, but it’s hard to see these affecting the other items so strongly.)

    The other big question is why, given the very large increases in so many items of normal spending, has the CPI risen so little?

    Any thoughts, UE, tentative or otherwise?

    • A ridiculously inflated cost of urban land filters through to all sorts of things, just as the costs of energy does.

      The same underlying problem, growth constraint urban planning, also strangles productivity growth; so the people are caught in a vise between constrained income growth and rising costs, both directly in housing, and indirectly.

      • The UK has the worst of both worlds. Go to London and you will see a city of 8 million people living, overwhelmingly, in Edwardian 4 story houses. Why it beats me as this hounsing has little architectural merit and is nigh impossible to insulate adequately. If instead they had 20 story modern appartment buildings it would be better for everybody. Energy usage does not improve with sprawl Phil.

        • Jason, the reason that London has the worst of all worlds, is because of their growth containment urban planning. This forces up the cost of urban land so much, that because all attributes of housing are rationed by “price”, more and more people have to sacrifice size, age, quality, state of repair, local amenity, and location efficiency.

          Supreme irony, most people in London cannot afford a home anywhere near where their job is. And congestion is appalling. So average commuting times in London are around double Houston or any of the sprawling low density US cities (LA is not low density BTW).

          The ONLY reason cities like London consume less energy per capita, is the savaging of discretionary income by housing costs, and the fact that people are forced to consume less space (for heating and cooling and so on). They also have high taxes on petrol.

          Low density, sprawled cities actually do not consume more energy “because their urban form is less efficient”, they do so because the people actually have the discretionary income to spend on it, space is cheap, and petrol is cheap. There are actually numerous ways in which low density, dispersed urban form COULD be made “sustainable” if it was financially necessary.

          Few people bother to set an example of “sustainable” low density living as yet, because the economic incentives are not there. If they were, more people would recycle, “compost” organic matter, grow their own food, use sunshine and fresh air for heating, cooling and clothes drying, use solar panels, burn biomass for cooking and heating, use small wind turbines, use trees for shade, use geothermal heat pumps, and numerous other possibilities. All these things are less possible in conditions of high urban density.

          “Communal” arrangements to achieve the same sustainabilities would occur anyway if the economic incentives are ever there. I am with the economists on this – use “prices” and incentives directly on the things you want to change, and let people decide the most efficient way to react; do not use highly indirect “blunt instrument” regulations. The former will have an immediate result, while trying to change urban form will take a century to get anywhere, and most of the consequences will be “unintended” ones anyway.

          Energy for mobility would be taken care of by “pricing” the energy for mobility, just as “pricing” the energy for home consumption would. It would be possible for the residents of Houston to slash their consumption dramatically just by using smaller and more efficient cars – let alone the potential for future improvements.

          And jobs-housing balance, along with relatively affordable house prices almost everywhere, means that most people can easily locate efficiently relative to any particular job they might take.

    • The real question that I’m sure all the UK population want to know the answer to is why so many things have risen in price far beyond the rise in wages

      Because they can. They’re just more advanced in class warfare than we are.

      The other big question is why, given the very large increases in so many items of normal spending, has the CPI risen so little?

      Because CPI is an arbitrary construct, often manipulated for political means.

      If I made the CPI basket just electronic goods, then we’d be in a decade long recession.

      The methodology of Australian CPI structurally has a downward bias.

      • RP, I agree, but I’m sure you would also agree that the huge disparity in the UK devalues the CPI’s credibility.

        • The Chav, like our Bogan, is unwilling and/or unable to scutinise CPI, let alone determine whether how credible a measure it is.

          Keeping a population dumb, there is method behind the madness.