Inflation’s two separate worlds (at least)

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This post was originally published on the Sense of Fairness blog (original post here)

The shocking statistics released last week by the Trussell Trust – the UK’s main foodbank provider, with a network of 1400 – bring to the statistical surface the reality of the cost of living crisis in the country. It is unfairness writ large, and it reflects the different worlds in which our people live.

Some may be shocked simply at the number of foodbanks in the UK, which is at least in theory a wealthy nation (as well as the Trussell Trust ones, there are an estimated 1200 further banks). But the fact that the Trussell Trust distributed more than 2.1 million food parcels in the year to end-March 2022 is still more shocking. That’s up 14% compared to the pre-pandemic year 2019-2020 and up no less than 80% in five years. What’s worse is the notable acceleration. The 14% increase in the annual figures masks quarterly variations, with Q2 up 10% against the 2019-20 equivalent, Q3 up 17% and Q4 up 22%. The last month for which the Trust provides figures, February, saw demand for food parcels up 25% over February 2020 numbers.

It is clearly a mark of an unfair society that so many should be so dependent. The opening line of the Trust’s statistical paper is shaming:

“Destitution, which means that people cannot afford to buy the absolute essentials that we all need to eat, stay warm and dry, and keep clean, drives the need for food banks in the UK.”

But it is all too easy for the comfortable to under-estimate the cost of living crisis. The averaged measure of inflation – the consumer prices index – reached a level unheard of for 30 years in March 2022, at 6.2%. This headline rate is what drives monetary policy decisions, and those within corporate boardrooms too. Yet the averages used to produce that statistic mean that few will actually experience that number. Those with lower incomes and less discretionary spending are likely to face far higher levels of overall inflation given the recent increases in the staple spending categories of fuel and food. People at other income levels will experience very different levels of economic pain. The overall statistic masks added unfairness to those least able to bear the burden. By concentrating solely on the headline figures, policymakers and corporate decision-makers may risk missing the real scale of the impacts for some members of society – in ways that may exacerbate existing unfairnesses.

The mere facts of these different experiences of economic life may be well understood, but the scale of it is not. The New Economics Foundation has produced two charts that bring this impact very fully to life. The first demonstrates the scale of the differential between those at different income levels, and the way in which the cost of living squeeze is a painful bear hug at the lowest income levels, while being not much more than a cuddle for the wealthy:

Any company board thinking about pay rises for top executives based on headline inflation would do well to take note of this chart, and the extent to which the wealthy are feeling only the most limited of impacts; they should also consider the extent to which even inflation-level pay rises for their general workforce may not be sufficient to reflect the squeeze that they are facing.

Perhaps even more shocking are NEF’s calculations regarding the differential impacts of the squeeze on pre-existing social unfairnesses:

Two further vignettes illustrate how this differential experience of inflation works in practice. First is a brilliant recent working paper, Consumption Inequality in the Digital Age. We already knew that digitalisation was a driver of inequality by narrowing the group of economic winners and by reducing others’ economic opportunities. But this paper notes that technology products form a greater part of purchasing by wealthier individuals – as well as becoming a greater proportion of all purchasing over time. This much is not terribly surprising; what is is the overall impact of these effects. The researchers state: “we demonstrate that the price channel has sizeable wealth effects and explains 22.5% of the increase in consumption inequality”. Just this one portion of the purchased basket has an outsized effect on inequality and entrenching unfairness. And it is masked by the headline inflation number, which has been consistently deflated by the falling prices of technology.

The second study considers how unequal experiences of headline economics can be driven by the debt burden that individuals face. The paper Indebted Demand takes a macroeconomic perspective but it is built on the insight that the propensities for marginal spending are very different for those with significant debt burdens than for those free of such burdens. The indebted – most of us – are constrained by debt and so our spending activities are curtailed. The wealthy (the paper cuts this as the top 1%) have a wholly different experience of economic life. Nothing surprising in that – but the point the paper makes is that with so large a portion of the economic actors in most economies being constrained by debt their ability and willingness to consume is eroded significantly. In effect, there is a transfer from the indebted to savers, depressing demand overall. And so, demand in the economy overall is restricted, it is the title’s indebted demand. Only by breaking out of this debt trap will consumption and economic activity be reawakened.

The paper notes that productive debt – debt financing capital investment for use in the economy – can have positive impacts. But it notes that most debt, certainly most household debt, finances housing and so is largely unproductive. It also considers the ballooning levels of student debt and notes that while this does have some productive impacts (in the rather unpleasant economic jargon, it builds human capital) to the extent it reflects merely increases in the costs of education and not greater investment in skills it should be viewed as unproductive debt.

Overall, the paper argues that many western economies are mired in a debt trap, with inequality being a feature of this market failure. The authors argue that economies will struggle to emerge from their current doldrums without ‘unconventional policies’:

“For example, redistributive tax policies, such as wealth taxes, or structural policies that are geared towards reducing income inequality generate a sustainable increase in demand, persistently raising natural interest rates away from their effective lower bound. One-time debt forgiveness policies can also lift the economy out of the debt trap, but need to be combined with other policies, such as macroprudential ones, to prevent a return to the debt trap over time.”

It remains to be seen whether the headline numbers will distract attention from the terrible nature of the challenge faced by so many in society. If they do, unconventional policies will probably not gain traction. But clearly something needs to shift if we are to reawaken fairness.