The human cost behind the statistics

Figures may conceal some worrying trends affecting households already under stress from unemployment and tax hikes, writes Mary Lambkin

THE latest figures from the Consumer Price index (CPI) for December — up by 0.2% compared to the previous month, and up 1.3% compared to December last year — doesn’t, on the face of it, sound like much of an increase, certainly not enough to get excited about.

It is still much lower than Britain and most other industrialised countries. British inflation soared to an eight-month high of 3.7% last month and is now the highest of any nation in the G7 group by more than a percentage point. British inflation is thought likely to climb higher still in January after an increase in VAT to 20% from 17.5%.

However, the CPI is an index that combines together all aspects of consumer spending and computes an average that can be compared over time. This averaging process conceals the fact that individual items may be changing up or down more dramatically than the average, although these differences cancel each other out when added together.

In Britain, the biggest drivers of inflation were air transport, fuel, utility and food bills. Fuel costs rose at their fastest annual rate since July, and food prices showed their biggest annual rise since May 2009.

Recent price increases in electricity, gas and petrol among other things here in Ireland suggest that our CPI index may conceal some worrying trends that are affecting many households already under stress because of unemployment, tax increases and so on.

Food accounts for almost 20% of all consumer spending, on average, and a much higher percentage for low-income households. It is therefore the first critical item that affects people if and when prices increase.

Fortunately, the CPI figures show food prices remained steady for 2010 as a whole, down by just -0.3%, following a big drop of 8.2% in 2009. Consumers have therefore experienced better value in their food shopping and this is critically important.

The evidence also shows consumers are being proactive in looking for better value. Research carried out by the National Consumer Agency (NCA) found people are now more price conscious, thrifty and better money managers.

Some 75% of consumers are now actively looking around for better value while 72% say the recession has taught them to think more carefully about what they buy.

A recent survey by Bord Bia showed the average household now spends €600 less a year on groceries than two years ago, and that cheaper cuts of meat, more own-brand products and special offers are also featuring more often on Irish shopping lists.

Housing, electricity and other fuels eat up 16% of our net incomes, on average, and prices in this category have gone up 9.9% last year. This comes from rising interest rates for those paying mortgages and from increases in electricity, gas, heating oil and other essential services.

There is an intense focus on mortgage interest rates and these rates went up by about 0.5% in 2010 following a 1.5% increase in 2009. That said, the affordability index — the percentage of income needed to service a mortgage is falling along with reducing house prices. At the peak of the housing boom, it cost almost 25% of income to fund an average mortgage.

This is now down to about 12% but of course, can only benefit new buyers. Those who bought at the top of the market and who are locked in to big mortgages and negative equity cannot benefit from this trend.

The ESB put its prices up by 5% in October and the new carbon tax was added to natural gas in May — putting about €48 a year extra on the bills of the average household (about a 6% increase). The hardship caused by these increases is demonstrated by the increasing numbers of households which are not able to pay their bills.

It has been reported that 80,000 ESB customers and 23,000 Bord Gáis consumers signed up to special repayment plans in 2010 because they cannot pay their bills. Almost 11,000 householders have been disconnected by the ESB and 2,750 by Bord Gáis, twice the number in 2009.

Transport is another essential that is hitting us hard. After food and housing, transport is the next biggest item of consumer spending, accounting for about 16% of our disposable income. The CPI index in December demonstrated what we all know only too well, that petrol and diesel prices have gone up dramatically and are continuing to do so.

Motorists are already paying over €1.40 a litre for petrol — up 40% on the cost of a litre in December 2008. The bulk of the petrol price hikes piled on the Irish consumer in recent years stemmed from increased taxes rather than international oil prices. Tax on a litre of petrol rose 4c in the recent budget adding to a 4c tax rise in December 2009 and an 8c tax rise in October 2009. Duties on diesel have also risen.

The cost of oil surged to a two-year high on the international markets recently and this increase will undoubtedly be passed on to consumers, so prices are likely to go up further, possibly to €1.50 per litre. This will have grave consequences for commercial vehicles and private car owners.

CLOTHING and household goods show a happier picture however. Clothes and household goods use up about 12% of our household income and the picture here is brighter.

Prices have actually fallen for these categories both in 2009 and again in 2010. Prices of clothes fell by 3.7% in 2010, following a drop of 10.2% the previous year. Household goods fell by 2.9% in 2010 and by 4.6% in 2009.

These price reductions reflect the fact that clothes and household goods are discretionary purchases that can easily be postponed or abandoned if money is tight. Retailers had to respond by price discounting in order to try to encourage people to make purchases, a move that had only limited success.

Most retailers found their businesses down by a considerable percentage with job losses and some closures being an inevitable consequence.

Services as a general category account for the remaining 30% of our income and this category shows great volatility. Some services like TV licences and VHI are seen as essentials for many people and they are loath to cancel them.

Others are discretionary and will be dropped or reduced immediately if money is tight. Examples include hairdressers, dry cleaners, eating out in restaurants and going on holidays. Even services such as dentists and insurance policies have felt this effect.

In total the CPI showed communications rising in price by 2.9% in 2010 and other goods and services by 2.4%. This seemed relatively modest although not helpful to a sector that was suffering from falling demand anyway.

However, it is inconsequential compared to the increases of 15%-45% that have just been announced by the VHI.

It has been reported that 120,000 VHI customers gave up their private health insurance in 2009 and 48,000 in 2010. It seems inevitable that this number will multiply rapidly once these price increases are implemented.

The relatively modest increase in prices suggested by the summary CPI index conceals a great deal of volatility in individual spending categories. Furthermore, most of the increases are in essential products and services such as electricity, fuel, and petrol/diesel. These increases collectively are making a very substantial impact on peoples’ ability to live, and the distress this is causing is being witnessed in the high incidence of disconnections and in people abandoning health insurance and other key services.

I’m not sure what can be done to alleviate this problem but it seems important at least to keep it in full view to make sure that decision makers in the supplier companies are constantly reminded of the human cost of their business decisions, and that politicians are reminded of the necessity to keep the pressure on to keep prices down as much as possible.

* Mary Lambkin is professor of marketing at UCD Smurfit business school and a consumer expert