Belated look at falling incomes

There belatedly follows my comment from the 21 March issue of Fund Strategy in which I discuss evidence showing that Britain’s official statistics have for many years underestimated the impact of inflation. One important implication of this is that real incomes have fallen even further than previously realised. A follow-up story in the Guardian by two of my colleagues explored the topic further.

This Monday’s BBC Panorama programme followed a similar theme. It pointed to research by the Centre for Economics and Business Studies which showed that real incomes have fallen by an average of 5% since 2009.

These figures underline the desperate need for a genuine campaign against austerity. Such a campaign can only be successful if it rejects the notion of limits to growth – the essence of growth scepticism.

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The story on inflation unearthed by Tomas Hirst and Nick Rice in this week’s Fund Strategy has substantial implications for virtually everyone living in Britain.

Wage earners, pensioners and savers are among those likely to have seen their earnings slashed. In addition, the story has an important bearing on the conduct of monetary policy and on investment returns.

In its Inflation Report (PDF) in February the Bank of England had already claimed that the Office for National Statistics had underestimated increases in clothing prices from 1997-2009.

As a result the Bank suggested that the real consumer-prices index (CPI) inflation rate was likely to have been about 5.5% higher than the original reported figure over the period. The retail-prices index (RPI) was probably a cumulative 8.1% higher.

However, it turns out the Bank only adjusted the inflation figure to take clothing into account. If a similar error in relation to footwear was also incorporated into the calculations the discrepancies would be even greater. Given that the inflation rate is the anchor on which so much is pegged, there are numerous important effects. Among them:

• In real terms, wages have fallen even further than previously recognised. Even before these revisions the governor of the Bank of England, Mervyn King, said in a speech in Newcastle (PDF)  that real take-home pay had fallen by about 12% over the past three years.
• Pension income, generally linked to an inflation index, has also fallen more than previously calculated.
• Monetary policy would probably have been conducted differently because the inflation target was breached earlier.
• Investment returns were miscalculated.

It is imperative that the Office for National Statistics publishes a full set of statistics to show the impact of these data revisions. Even more importantly, there should be a public debate about the implications of such grave error.