Yesterday saw the publication of a first report, Growth Without Gain, by the Resolution Foundation's Commission on Living Standards. The Foundation focuses its efforts on people on low to middle incomes rather than the very poor – the group described as the 'squeezed middle'. The report is a first step towards understanding the economic circumstances of households in these low to middle deciles of the income distribution, and will be followed by more detailed research and interviews with families in this category, with a final report next year.
I took part in a fascinating panel discussion of the report yesterday with the Commission's secretary, James Plunkett, LSE economist Steve Machin, and author and guru Will Hutton (I believe the vodcast will be posted here in due course). The debate centred mainly on the labour market trends that probably explain the pressure on living standards – the higher return to high academic attainment and the hollowing out of middling jobs, due to technical change and globalisation, and the failure of education and training to match the changes in labour demand.
However, one chapter of the report to attract my attention was the differential impact of inflation on this group of households. The report looks at inflation in different categories and the share of spending different types of household incur in each category. What's more, in a time of inflation, these groups with little labour market bargaining power never manage to keep their wages growing in line with prices. This is something I know about from experience, having grown up in the 1970s when UK inflation reached around 27%; we went short of some things, and my mother used to hoard foodstuffs such as sugar and tea because they would be much dearer later.
Gavin Kelly, the Resolution Foundation's chief executive, noted that in the interviews with families they've started conducting, people spontaneously mention the effect of rising prices on their standard of living, not the effect of tax and benefit changes. UK inflation is already too high and there is no sign that either the Bank of England or the Treasury is really taking it seriously yet. Although the current 4.5% is well below 1970s rates, and one should not exaggerate the current situation, the authorities should remember that inflation is socially corrosive – and that the measure of inflation expectations they track has climbed from 3.3% in February 2010 to 4.4% in February 2011.
Inflation also redistributes wealth randomly (especially from ordinary savers) and makes all but the richest feel worse off. In a brilliant book, When Money Dies, first published in 1975 and recently reissued, Adam Ferguson traces the impact of German hyperinflation on subsequent political extremism. All of central Europe was affected, and the interwar social and political order – such as it was – fatally undermined by the phenomenon. (The brilliant wiki image shows banknotes being swept off the street in Budapest after the sudden replacement of the pengo in order to end the hyperinflation there.)
Of course we are nowhere near hyperinflation or even worrying ordinary inflation, but it would be reassuring to see signs that the Bank was thinking about where the vast quantities of money it's printed since 2008 have sloshed away to. A number of the comments at the event yesterday concerned the unskilled jobless and prospect-less young men as a source of political instability – the event's chair, Faisal Islam, raised this issue – and that's surely true. It is unforgivable to be churning so many boys through school without equipping them with any relevant employment skills. But there's more than one aspect of the current economic conjuncture threatening instability.
