Poor hit hardest by dearer oil, says study

Research rejects myth of high middle-class inflation · Low earners spend bigger slice of income on energy Ashley SeagerThursday September 7, 2006The Guardian
The poorer rather than richer sections of society have suffered more from the surge in oil prices over the past two years, says research published yesterday.
Some recent media reports have said that so-called middle-class inflation is nearer 10% than the two officially measured annual inflation rates of 2.4% and 3.3% on the consumer price index (CPI) and retail price index (RPI) respectively.
This is said to be because of things such as rising school fees, council tax and energy prices. As richer people have bigger houses and cars, the argument goes, so they suffer more from the rise in petrol, gas and electricity prices.
But a study by John Hawksworth, the chief economist at PricewaterhouseCoopers, shows that the rise in general inflation caused by oil prices has primarily affected the poorest third of the population because they spend a greater proportion of their income on energy than the better off.
He has produced an estimate of the inflation faced by different sections of the population, divided into 10 income groups, or deciles. He has used the 2004-5 Office for National Statistics' family spending survey to work out what the different groups spend their money on and, therefore, what their inflation rate is.
The graph shows that in 2003 and 2004, the inflation rate faced by all groups was almost the same, at about 1.2% on the CPI measure, with a rate 0.1% higher for the richest 10%. But in 2005, and more so in the year to July this year, inflation was more pronounced for the lowest four income groups.
"The tendency for the lowest income deciles to have higher CPI inflation rates has become more marked, with the poorest 20% of households facing an average inflation rate of around 2.8%, compared to the national average of 2.4% and the estimated rate of 2.1% for the richest 30% of households," says Mr Hawksworth.
The reason, he says, is mainly the much higher weight of energy bills and, to some extent, food bills in poorer families' budgets. "Since energy has been the large expenditure category with by far the highest inflation rate recently, it is the poorest households who have apparently faced the highest inflation rate - not the middle-class households. The richest households have apparently faced the lowest rate of all over the year to July 2006."
The ONS produces separate data showing the inflation rates faced by pensioners who are mainly dependent on benefits and who spend a lot on utility bills. Its latest figures show single pensioners are facing an inflation rate of 4.1% while a pensioner couple are experiencing a 3.3% rate.
Mr Hawksworth says that the slightly higher rate faced by the top income group in 2003, 2004 and 2005 was probably due to the fact that this group was spending more on private education than other groups. But he pointed out that, contrary to reports in several newspapers, school fees are picked up in the CPI measure.
School fee inflation has been strong for years. Recent figures from the Halifax showed that school fees have risen by an average of 7.5% annually in the past five years, though by only 6% in each of the past two years. Only about 7% of children attend private schools, however, so it is an issue affecting a tiny proportion of the population.
Some newspapers have suggested that the CPI is a bad measure since it excludes council tax and mortgage payments. The RPI, however, includes these and is currently showing an inflation rate of 3.3% - not 10%.