What is the cost of living?
The amount of money needed to cover expenses such as food, clothing, housing, heating, travel and entertainment to live at the standard that the average household can afford. As the income of the average household comes mainly from selling their ability to work to an employer, the cost of living is in effect the cost of maintaining and recreating the working skills of an average wage-earner household; the cost of living as a worker.
How is the cost of living measured?
By the total price of a basket of goods and services that households typically buy. In Britain this is calculated each month. The contents of the basket are slightly changed each year to reflect changes in buying habits. The result is not expressed as a figure in pounds and pence but as an index, against a given year, the base year, fixed as 100. In Britain the base year for this ‘Consumer Prices Index’ is 2015. In April 2022 it was 119; which means it has increased by 19 percent or at about 2.5 percent a year since 2015.
Is an increase in the Consumer Prices Index a measure of inflation?
That’s the official view but it’s actually only a measure of the average rise in consumer prices. To equate this with ‘inflation’ is misleading as it obscures the original meaning of the term and the fact that there are other reasons why the index can go up. Inflation, as the word itself suggests, is increasing (‘inflating’) the money supply beyond what the economy requires for its transactions. If this happens there is a general rise in prices, all prices rising as a result of the depreciation of the money tokens issued by the government or its central bank. If the economy requires, say, 1 million units of money and the government issues 1.1 million units, then the price level, as measured by the index, would go up by 10 percent. But this is not the only reason why the Consumer Prices Index can go up.
What is another reason?
The price of one of the goods or services in the basket going up because of a supply side problem. If paying demand exceeds supply this will push up the price of the good concerned. This would lead to an increase in the Consumer Prices Index (or CPIH if housing costs are included) but wouldn’t be inflation in the original meaning of the term. In the 12 months to April 2022 the index went up by 7.8 percent, which is a considerable acceleration of the average over the preceding 7 years. In their press release explaining this increase, the Office for National Statistics noted:
‘The largest upward contributions to the annual CPIH inflation rate in April 2022 came from housing and household services (2.76 percentage points, principally from electricity, gas and other fuels, and owner occupiers’ housing costs) and transport (1.47 percentage points, principally from motor fuels and second-hand cars)’ (bit.ly/3GWXRz7).
The index went up, in other words, mainly as a result of the continuing rise in the energy element in the basket, though the prices of some other goods and services went up too due to continuing supply chain problems caused by the pandemic restrictions. The index didn’t go up by that amount due to the Bank of England inflating the money supply.
Can the index go down?
Yes, it sometimes does slightly fall in the summer months reflecting the lower prices then of fresh fruit and vegetables. In fact, because of increasing productivity in the production of material goods, you would expect that the index would tend to fall over the course of time rather than rise as it has done. That it doesn’t is due to deliberate government policy. If prices were continually falling this would tend to encourage people to put off buying some item in the hope that its price will fall. To encourage firms to produce and people not to wait to buy, the government has mandated the Bank of England to keep the rise in the Consumer Prices Index to 2 percent a year.
How does the Bank do this?
By inflating the money supply. This means it can be said that, in theory, at least 2 percentage points in the yearly rise in the index are due to inflation in the original sense of the term and that at the moment anything substantially above this is likely to be attributable to other factors such as supply problems for particular goods or services. When, earlier this year, the index began to move towards an increase of 5 percent a year the Bank was not that worried, arguing that it would only be temporary and that within a year or so the index would fall back to what it had been. Now, with the war in Ukraine and the sanctions against Russia, they are not so optimistic and are predicting that the index will go even higher, even to double digits, and that this will last longer.
A real cost of living crisis, then?
Yes, consumer prices, especially of energy, have risen to a level at which the average household cannot afford to live at their previous standard of comfort. A fall in people’s standard of living is worse for the already worst off.
What can we do about it?
Don’t expect the government to do much. Unfortunately, there is not much that those dependent on state benefits can do except take whatever extra the state has decided to hand out. Those dependent on an income from working for an employer can – and should — struggle, through their trade union, to get a higher price for what they sell. Given current labour market conditions they should be able to get this, even if it will just be stopping things from getting worse. The media will blame them for causing ‘inflation’ but even the government’s own statisticians admit that the Consumer Prices Index has shot up for supply reasons and not because of ‘greedy workers’. In any event, wages have always been linked to the cost of living, as this means the cost of living of a wage-worker. So if this goes up it’s normal that wages should too; otherwise we won’t be getting the full price of what we are selling. But the struggle to keep wages up with the cost of living, necessary as it is, is a never-ending struggle which will last as long as the wages system does.
Why is there a cost of living anyway?
Good question. Why should we have to pay to live? It’s only because the means of life are monopolised by a tiny minority who live off profits and which obliges us to work for wages, out of which we have to buy what we need to live. If the means of life – the productive resources of society – were owned in common by society as a whole, then we could produce what we needed and people would have free access to what they need to live and enjoy life. There would be no cost of living and no perpetual struggle to try to keep up with it.
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