Inflation outstrips wage growth as cost of living hits 2.5pc
HOUSEHOLDS will continue to feel the squeeze as price rises have overtaken wage growth. Inflation crept up by 0.1pc in July to 2.5pc, up from 2.4pc in June, according to official statistics.
The rise in the consumer price index (CPI) was driven by more expensive transport, along with some other items such as computer games. The so-called sugar tax may also have had an impact, as food and soft drinks have become more expensive. The Soft Drinks Industry Levy, brought into force in April this year, has added to the cost of buying many non-alcoholic beverages. Prices for juices and soft drinks were up by 6pc in July compared with January this year.
Some of the transport price increase was offset by a fall in the cost of other goods including clothing and footwear. Women’s clothes in particular have become cheaper, leading to a 3.7pc fall between June and July.
The cost of travelling in a coach or car has rocketed by 15pc since January 2016. This is largely due to the rise in the price of crude oil, which has touched on $80 per barrel this year for the first time since November 2014. By comparison, travel by rail has risen 8pc since January 2016.
Mike Hardie of the ONS said: “Transport tickets and fuel, along with often erratic computer game prices, drove
‘Transport tickets and fuel, along with often erratic computer game prices, drove costs for consumers’
up costs for consumers. On the other hand, there was a drop in prices for women’s clothing and footwear.” According to John Hawksworth of PWC, inflation is likely to remain “sticky” at close to 2.5pc, keeping real wage growth to a minimum. However, the Bank of England is unlikely to raise interest rates again until a final Brexit deal is struck, after hiking them to 0.75pc in August.
The retail price index (RPI) measure of inflation, which includes housing costs, slipped to 3.2pc in July from 3.4pc in June. The July RPI figure is used to cap rises in regulated rail fares each January.
Rail fares need to rise and it is fantasy economics to claim otherwise. The Government has fallen into the “free stuff ” trap. Train companies need to make bigger profits and commuters should pay for it.
If not, we risk seeing more Carilliontype failures where politicians encourage companies to charge ultra-low prices without thinking about the need for public services to be run on a sustainable basis.
Chris Grayling wants rail operators to voluntarily forego a chunk of future fare hikes by using the CPI measure of inflation rather than RPI. As good as this sounds for anyone who gets stung with a price hike every January, it is not sensible financially or politically.
On the political front, the Conservatives are never going to out-freebie Jeremy Corbyn’s Labour. Grayling is giving the false impression that he can give commuters lower fares. This will fail. It is a one-way ticket to lower poll ratings.
Financially, it is madness too. In the short term, it risks reopening franchise contracts and pay deals with unions, with dire consequences – recall the strikes commuters endured before the current deals were set.
The longer-run outlook would be worsened too. Rail operators complain that they only make a profit margin of 2pc. This is utility-level pricing for what is in fact a risky business.
Strikes can throw the companies off track. Bad weather, technical problems, changing regulations and self-inflicted wounds from bungled timetables can trash earnings too. With a wafer-thin margin, even small disruptions can force businesses into the red, risking franchise failures.
At a time when more investment is desired, this leaves little room and less incentive to spend more on the future of the service. Stagecoach and National Express have pulled out of the market. Virgin’s East Coast mainline franchise failed and the line was taken into public administration.
If the Conservatives want to stand up for their principles and support competition, they should allow prices to rise to bring in more players.