Average inflation falls, but remains high for some

Older and poorer households are facing much higher average inflation rates than younger and richer ones, as the former have tended to suffer most from continued high annual inflation in food and domestic energy costs, while the latter have tended to benefit most from cuts in mortgage rates and falling motor fuel bills, according to a new analysis of official data that is being launched as part of the ESRC Festival of Social Science.

Inflation figures published by the Office for National Statistics (ONS) are based on an ‘average' basket of goods and services purchased by households. Different households will face different inflation rates according to their own expenditure patterns. Using more than 30 years of data on household expenditures from the Expenditure and Food Survey, along with RPI inflation data over the same period, IFS researchers have calculated household-level inflation figures and looked at how inflation varied both across and within household types.

Since peaking at 5% last September, the all-items Retail Prices Index (RPI) measure of inflation has fallen rapidly and stood at just 0.1% in January 2009, with forecasters predicting that it will soon fall below zero for the first time in around half a century. The headline inflation gives more weight to relatively high-spending households, for whom the inflation rate is currently relatively low. The average inflation rate we calculate across all households, at 2.1%, was therefore higher than the RPI rate, but down from 6.7% in September.

Despite the average inflation rate currently being so low, there is much more variation across households than last autumn. Just under one-third of households faced negative inflation rates in January 2009, but around one- quarter still faced inflation rates above 6%. This is an unusual amount of variation, arising because some very important items of spending like mortgage payments and motor fuel now have inflation rates far below zero, whilst the prices of other important items like food and domestic fuel are still much higher than a year ago.

Older and poorer households are currently facing the highest average inflation rates because they spend much more of their budget on food and fuel than other households. In January 2009, RPI food inflation was 9.9%, only a little below the 11.2% rate for food last September, while household fuel inflation was 35.1% in January, down only slightly from 39.6% in September.

By contrast, richer households, and in particular those with mortgages, now have very low inflation rates, on average below zero. Thanks to cuts in the base rate, mortgage interest inflation fell from -2.9% in September to -34.7% in January.