THE COST OF LIVING
This outline of changes in the cost of living sets out the rates of inflation that workers have
been facing over recent months and years, the main factors in those changing costs, the
forecast levels of inflation in coming years and estimates of the differing level of inflation
facing the low-paid.
1. Historical inflation rates
The most widely reported measure of inflation in the UK is the Consumer Prices index (CPI).
However, the most accurate indicator of changes in the cost of living facing workers is the
Retail Prices Index (RPI) [for the reasons why RPI is most relevant, see section 6 below]
Inflation has generally been in decline over the last two years and over 2015 they have
stablilised with CPI around zero and RPI around 1%. The latest inflation figures to December
2015 put RPI at 1.2% and CPI at 0.2%.
Inflation rates
CPI
RPI
3.5
% change over 12 months
3
2.5
2
1.5
1
0.5
Dec-15
Oct-15
Aug-15
Jun-15
Apr-15
Feb-15
Dec-14
Oct-14
Aug-14
Jun-14
Apr-14
Feb-14
Dec-13
Oct-13
Aug-13
Jun-13
Apr-13
Feb-13
-0.5
Dec-12
0
Year / Month
Source: Office for National Statistics website at www.ons.gov.uk
Between the start of 2010 and the close of 2015, the cost of living, as measured by the
Retail Prices Index, rose by a total of 19.5%.
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2. Impact on real wages
The most recent data from the Annual Survey of Hours and Earnings suggests that the real
value of average UK pay packets has fallen by 12% since 2010, with employees losing
almost £2,800 a year from the value of their pay packet since the government came to office.
The average worker would have accumulated more than £16,700 more had their wage kept
pace with inflation.
For the public sector worker who has not benefited from any incremental progression in their
pay, the decline has been even sharper. Between 2010 and 2015, the public sector worker
on the median wage saw a 14% cut in the real value of their earnings, leaving their 2015
wage £4,854 down on the value of their earnings at the start of 2010 and the accumulated
loss from their wage failing to keep pace with inflation each year stood at over £21,447.
3. Main factors affecting inflation
The changes in the price of components of the Retail Prices Index over the year to
December 2015 are shown in the table below.
Item
Average % increase to December 2015
Personal expenditure
3.6
Consumer durables
2.9
Housing and household expenditure
1.8
Mortgage interest payments & council tax
1.3
Alcohol and tobacco
1.1
Travel and leisure
0.7
Food and catering
-1.1
All goods
-1.2
All services
2.9
All items
1.2
Source: Office for National Statistics, Consumer Price Inflation Reference Tables, December 2015
The drop in the inflation rate over recent years has been driven by declines in energy prices
after years of strong growth, along with falls in food prices. However, the biggest cause has
been the major fall in oil prices. Nonetheless, some costs are rising significantly, with a 6.8%
acceleration in prices for clothing and footwear, along with a 12.4% rise in travel fares,
among the most notable features of the latest inflation figures.
The price of housing also remains one of the biggest issues facing employees and their
families. Across the UK, house prices rose by 7.7% in the year to November 2015, taking the
average house price to £287,0001. However, the picture varied across the nations of the UK,
with England experiencing the biggest increase at 8.3%, followed by Northern Ireland at
1
Office for National Statistics, House Price Index November 2015, published January 2016
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4.6%, Wales at 1.3% and Scotland at 0.4% (to see price changes in English regions, click
here , or for a borough / county breakdown click here ). The ratio of average house prices to
average earnings grew in every country of the UK between 2012 and 2013 except Scotland.
The ratio stands at 11.8 in England (14 in London), 8.7 in Wales, 8.4 in Scotland and 7.1 in
Northern Ireland2.
The rate of increase in rents has also been well ahead of general price increases, runnining
at 4% over the year to November across England and Wales to hit £799 a month3 (for a
regional breakdwn of rents click here ). New tenancy rates have been increasing even more
rapidly, with a jump of 4.9% across the UK (excluding London) in the year to December
20154 and London experiencing increases of 8% over the same period. For a regional
breakdown on new tenancy rental price inflation click here
Though not specifically assessed by CPI or RPI figures, childcare costs represent a key area
of expenditure for many staff (UNISON surveys have consistently found that around a third
of staff have child caring responsibilities).Therefore, it is also worth noting that the annual
Family & Childcare Trust survey5 for 2015 found that the cost of a part-time nursery place for
a child under two has increased by 33% since 2010. Over the last year, a nursery place for
25 hours a week has risen by 5.1% to £6,003 a year. The cost of part-time care from a
childminder has also risen by 4.3% to £5,411 a year.
Current inflation rates can mask longer term changes in the cost of living that have taken
place since 2010. For instance, food price inflation is currently quite low, but between 2010
and 2015 it saw major rises, as reflected in the table below.
Item
% price rise
2010 - 2015
Item
% price rise
2010 - 2015
Item
% price rise
2010 - 2015
Beef
26%
Fruit
16%
Gas
32%
Fish
18%
Mortgage interest
payments
16%
Electricity
28%
Butter
24%
Bus and coach
fares
21%
Water
18%
Potatoes
15%
Rail fares
23%
2
Office for National Statistics, Trends in the UK Housing Market, 2014
3
LSL Property Services. Buy to Let Index, November 2015
4
HomeLet Rental Index, December 2015
5
Family & Childcare Trust, Childcare Costs Survey 2015
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4. Forecast inflation rates
The Treasury average of independent forecasts predicts that RPI inflation will rise by 1% in
2015, climb to 2.1% in 2016 and then accelerate to 3% or over every year between 2017
and 2019, following the pattern shown in the graph below.
Forecast annual increase in cost of living
3.5
3
% increase
2.5
2
1.5
1
0.5
0
2016
2017
2018
2019
Source: HM Treasury Forecasts for the UK Economy, November 2015
If these rates turn out to be correct, the cost of living employees face will have grown by over
12% by the close of 2019, following the pattern set out in the graph below.
Forecast cumulative increase in cost of living
14.0
12.2
12.0
% increase
10.0
8.6
8.0
5.2
6.0
4.0
2.1
2.0
0.0
2016
2017
2018
2019
Given the government’s announcement in the July 2015 emergency budget of its intention to
extend the 1% public sector pay cap for four years between 2016 and 2019, the potential
impact of this inflation forecast on the value of an average public sector wage is shown
below. At the end of the four year period, the average wage would have declined in value by
over £2,400 under this scenario.
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Impact of 1% pay cap on value of
average public sector wage
Cut in value of annual pay (£)
0
2016
-500
-1000
2017
2018
2019
-328
-939
-1500
-2000
-2500
-1669
-2430
-3000
5. Inflation for staff on low pay
In 2014, the Institute of Fiscal Studies published a study which found that, between 2008
and 2013, the lowest income fifth of households faced average annual inflation that was 1%
higher than the highest income fifth.6
This conclusion was bolstered later in the same year, when the Office for National Statistics
found that, among the lowest-spending households, average annual inflation ran 1% higher
than the highest-spending households between 2003 and 20137. The cumulative result was
that the prices of products purchased by the lowest-spending households grew by 45.5%,
compared with just 31.2% for the highest-spending households.
6. Reason for comparing wages to RPI
UNISON believes that the Retail Prices Index (RPI) remains the most accurate measure of
inflation faced by employees.
The most widely quoted figure for inflation in the media is the Consumer Prices Index,
However, UNISON beleives that CPI consistently understates the real level of inflation for
the following reasons:
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
CPI fails to adequately measure one of the main costs facing most households in the
UK – housing. Almost two-thirds of housing in the UK is owner occupied, yet CPI
almost entirely excludes the housing costs of people with a mortgage;

CPI is less targeted on the experiences of the working population than RPI, since
CPI covers non working groups excluded by RPI – most notably pensioner
Institute of Fiscal Studies, IFS Green Budget 2014
7
Office for National Statistics, Variation in the inflation experience of UK households: 2003-2014, December
2014
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households where 75% of income is derived from state pensions and benefits, the
top 4% of households by income and tourists;

CPI is calculated using a flawed statistical technique that consistently underestimates the actual cost of living rises faced by employees. The statistical
arguments are set out exhaustively in the report “Consumer Prices in the UK” by
former Treasury economic adviser Dr Mark Courtney, which is summarised here
For a more complete explanation of inflation indicators and arguments for countering any
employer attempts to move away from RPI as the key reference point for pay bargaining,
click here
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