Bloomberg: who is inflation hurting the most?

I’m now approaching the end of a ten week internship at Bloomberg News in London. It’s been pretty great.

A couple of thoughts about a piece published under my byline today.

Families’ 5% Inflation Heaps Election Pressure on Cameron

The piece picks up a lot on the potent politics of the ‘Squeezed Middle’. I want to pick up a couple of bits about economics and methodology. 

In a sense there is nothing groundbreaking going on here. The ONS measures inflation for the average household according to a basket of goods. But the ‘average household’ is a statistician’s tool. Few households match the description. Some will spend a greater share of their income on food; others will be able to put aside more for restaurants and foreign travel. Different households therefore see prices rising at varying paces according to their socio-economic profile.

The top line of my piece points out that middle income families with children face higher rates of inflation than the headline 1.6% CPI figure for August suggests. Single households on low incomes, meanwhile, are seeing the price of their typical bundle of goods increase very slowly, by as little as 1% (largely because food prices are down).

The individual-specific inflation model I used was developed last year by Michael McMahon at Warwick University. The BBC’s ‘personal inflation calculator‘, which uses it too, brought it to my attention. The model can’t discern each individual’s inflation rate. But it can give us clues as to which sorts of people have seen the biggest squeeze in the past year.

A final point. Education drives the 5% figure because the increases in its price – chiefly due to the raising of the tuition fee cap – have been so steep.

One caveat when considering the effects of that price increase though. Save for the relatively few households who are paying up now, the increase will have a deferred impact on household expenditure because most students take out loans. Households with students will be paying more, for sure, but when we talk about increases in the inflation rate for those households, it’s possible that we’re making talking more about an accounting change than an immediate increase in the day-to-day cost of living. 


London Renters Win in Billionaire Backyard as Prices Soar

London Renters Win in Billionaire Backyard as Prices Soar

In a way this makes no sense. Rent in London is high relative to other U.K. cities and many category peers in other countries.

Relative to London house prices however, which have rocketed since 2009-2010, rental values are low. That’s true elsewhere too: the U.K. house price to rental price ratio is 40 percent above its long-term average, the IMF says. There are well-stated reasons why that could be a new normal. Notably the supply of new housing has failed to keep pace with demand for a decade or more.

But it could be a new bubble. One reason why rents are a good comparator is that they tend to be constrained by income. Unless you make do with continually smaller living spaces and such what, rental values can’t increase much more than income growth, which in the U.K. has been pretty flat. That house prices have gone up by 40, 50 or even 60 percent in the capital in recent years suggests, to some degree, that property is over-valued.

In the meantime, some tenants have found themselves living in properties with a million pound+ paper value, paying rents commensurate with a valuation of only half or a third of that.