Poorest families' standard of living 'will continue to fall'

• Study for Joseph Rowntree Foundation shows fall in spending power of low-income families of 10% in decade
• Rising global demand for food, cotton, fuel and other commodities pushing up prices of basic necessities

About seven million of Britain's poorest people will see their spending power fall by a tenth over the next decade because the prices of essentials such as food, fuel and clothing are rising much faster than inflation, according to new research.

With inflation figures tomorrow expected to show another rise in the cost of living, research for the Joseph Rowntree Foundation shows that these households, where typically nobody is employed, have already seen their spending power reduced by about 10% in the past 10 years. This means that by 2020 they will be nearly a fifth worse off than they were in 2000, if, as expected, pricing trends continue.

Donald Hirsch, head of income studies at Loughborough University's centre for research in social policy, who conducted the research, said: "This really shows how world factors are affecting the standard of living in the UK as rising global demand for food, cotton and other commodities pushes up prices of basic necessities."

Tomorrow's inflation figure is expected to put the rise in the cost of living at 3.4% in December on the consumer price index (CPI) measure, way above the Bank of England's target of 2% and further evidence for hawks on the bank's monetary policy committee, who believe that interest rates must be raised before prices spiral out of control. The wider retail price index (RPI), which includes housing costs such as mortgage interest, is forecast to rise to 4.8%.

There is mounting concern that fuel prices in particular need to be curbed as oil nears $100 a barrel. David Cameron has spoken out in recent weeks about the need to tackle inflation.

Hirsch's latest research suggests that the last decade's jump in the basic cost of living will continue, or even accelerate, in the next 10 years, with increasing price volatility as the rising value of commodities prompts hedge funds and other speculators to funnel more money into basic raw materials. This means that while the prices of wheat, cotton and other basic commodities is growing substantially over time, in the short term they will see-saw with increasing magnitude and frequency.

"All the talk about recent VAT increases [of 2.5 percentage points] is a storm in a teacup compared to some of the price rises we're seeing elsewhere, where the long-term trend is almost certain to be up, and quite seriously," added Hirsch. "I wouldn't be surprised if the gas price doubled again in the next decade after tripling in the past 10 years."

The persistent growth in basic household expenses such as council tax, water, public transport and, more recently, energy and food, means that the cost of buying the basics – known as the minimum income standard (MIS) – increased by 38% in the 10 years to April 2010. Over the same period the RPI, to which benefits are tied, rose by 31%, leaving those relying on the state significantly out of pocket.

But the poorest households – so-called workless families comprised of single people and couples, with or without children – are to set to lose out at an accelerating speed from April, when their benefits will be tied to the CPI rather than the RPI.

The CPI has consistently grown by less than the RPI, increasing by only 23% in the 10 years to April 2010, and this trend is expected to continue.

Rhian Beynon, head of policy and campaigns at Family Action, a charity helping disadvantaged families, said: "This could be the decade of despair for the poor families we work with, and they will certainly face desperate choices as income shrinks and price rises impact on parents' ability to support their children … These price rises could break them."

Although those relying exclusively on state benefits will be hit the hardest, millions of other people in the UK who have limited disposable income will see their standard of living reduced. The poorest pensioners are a particularly vulnerable group, Hirsch warns.

This is because, although private pensions have increased in importance, 60% of pensioners – or nearly eight million people – still get more than half of their income from the state, which in April will begin linking pensions to CPI rather than RPI, in line with changes to unemployment benefits. None of these people are included in the seven million "workless" families, which only covers people of working age.

The issue of the rising cost of living has gained momentum in recent weeks. The soaring cost of sugar, grain and oilseed drove world food prices to a record in December, surpassing the levels seen in 2008, when price rises sparked riots around the world.

The Food and Agriculture Organisation index, which tracks the prices of a basket of cereals, oilseeds, dairy, meat and sugar, hit a record 215 points last month, up from 206 in November, to break the 213.5 high registered in June 2008. It shows a dramatic rise in food prices for the decade, since the Rome-based UN agency's index stood at only 90 in 2000 and did not break through the 100 mark until 2004.

Meanwhile, the price of cotton jumped by 54.8% last year, prompting the British high-street retailer Next to increase its clothing prices by 8%, while copper rose by 20% and soya beans by 32%. In addition, UK rail fares increased by an average of 6.2% this month, confirming the network as the priciest in Europe. Against this backdrop, a 10% decline in spending power over the next decade for those people on benefits may sound like an underestimate. However, Hirsch points out that there is a lot of fluctuation in some key prices, meaning that some years they can go down considerably, as well as up. For example, while oil is at a historically high level and rising in price, its present cost of just under $100 a barrel is still well below the $145 peak it hit in July 2008 on a wave of big buying by international speculators. Furthermore, Hirsch says, we tend to forget about the things that get cheaper, such as manufactured goods, many of which have gone down considerably.

Finally, a CPI-linked rise in benefits will mitigate much of the increase in the prices of the MIS.

The Joseph Rowntree Foundation's minimum income standard is similar to the government's official poverty line, but requires more cash because it is concerned with the spending needed to make people feel part of society and so includes expenses such as mobile phones and a one-week domestic holiday a year.

The poverty line is defined as 60% of median income – about £119 a week, after tax and excluding housing costs, and £288 for a couple with two children. The minimum income standard is slightly higher, at £175 and £403, respectively. To satisfy the minimum income standard, a single person needs a pre-tax salary of £14,400, while the couple with children would need £29,200.


Tom Bawden

The GuardianTramp

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