Price inflation and income distribution

With the risk of being ridiculed for self-promotion, readers may want to have a look at some recent computations.

Earlier, Callan, Keane and Walsh had a look the impact of recent changes in taxes and benefits on nominal income. They found a sizeable redistribution from rich to poor.

An Bord Snip Nua argued that benefits should be indexed on the consumer price index, which would be tantamount to a 5% cut.

In the paper with Jennings and Lyons, we compute the consumer price index per income decile. The highest incomes have seen the fastest deflation, up to 5.1% for the period July 2008 to June 2009 for the top 10% earners. The three lowest income deciles have seen deflation in the range of 3.0 to 3.4%.

By the argument of An Bord Snip Nua, a 5% cut in benefits thus seems a bit harsh.

On the other hand, deflation has been slower for lower incomes because local authority rents have continued to go up even as the rest of the housing market collapsed. As local authority rents are indexed on renters’ incomes, a cuts in benefits would in fact induce deflation for this, particularly vulnerable group.

A 3% cut in nominal benefits would therefore mean that the poorest people in Ireland would see a rise in their real income.

13 replies on “Price inflation and income distribution”


I salute your courage in entering this minefield. I expect you’ll attract some flak from the following direction ( which extracts selectively from the CPI by detailed sub-indices to make the case that the lowest income deciles aren’t any better off. I expect it would require very fine parsing of the HBS data to reconcile this position with your suggestion that a modest cut in social welfare payments might be justified.


Very interesting paper and a useful contribution to the debate. One thing I’m confused about is how people who don’t live in social housing but have recently become unemployed – e.g. graduates who can’t get jobs and live in private rented accommodation, professionals like architects, engineers, solicitors etc. who are now dependant on SW but live in negative equity housing and likely facing a mortgage interest rate hike in the near future – will be affected by any cut in social welfare rates?

Well Ive always maintained that price deflation benefited the middle classes more than the poor.

The prices of jimmy choo shoes and BMWs are falling like there is no tomorrow, these are items of the middle class basket.

Food(okay maybe not now), public transport and council house rents have all increases,. these are the items of the poor man’s basket.

The analysis strictly applies only to those who stay within their income decile. People who move between income deciles (that is, lose their job) take quite a hit.

@Richard, thanks. And sorry again for mugging your thread.

On topic, (speaking from personal experience), I made a very unexpected move from higher middle income to social welfare income about 18 months ago.

One thing about living on social welfare is that you have little or no discretionary spending, so real income is much more important than nominal income. ie I could increase my real income by shopping in Lidl rather than the outlets I normally used.

Some costs also fall because of the change of circumstances, eg transport, in nominal terms, took a very large fall (although perhaps not in % of income terms).

Basically, the only costs that matter to the lower income groups are the essentials. Food, Housing, Heat and Power.

Any cut in Social Welfare rates would have to be accompanied by a very clear and sizeable cut in one of those to maintain real incomes. (and prevent considerable unrest).

How many of us contributing to this discussion are currently in the lowest income deciles? The baseline from which any increase or decrease occurs makes a huge difference.

@LorcanRK “Any cut in Social Welfare rates would have to be accompanied by a very clear and sizeable cut in one of those to maintain real incomes. (and prevent considerable unrest).”Just heard Board Gais announce a cut in gas prices from October???? They also plugged the fact that their helping people move over to their cheaper Electricity.Expect the Wolves to be baying for SW cuts in Budget 09.p.s.sorry to hear you have moved “DECILES” TERRIBLE BLOODY WORD FOR FELLOW CITIZENS.Anyhoo hope things turn around for you sooner rather than later.

Eye on the ball boys and girls. It’s not about those on benefit levels, it’s about the benefits trap – we’re back to the late 80s/early 90s again.

Rather than tinkering with benefit levels, we need to take crisis and create opportunity to review what’s gone on over the last decade – huge rises in pensions, minimum wages, benefits/allowances and non-monetary benefits which was politically helpful and given the inflationary environment essential in some cases but has undoubtedly created perverse incentives and disincentives in a difficult employment environment.

We need people to go out, take chances and create jobs with their severances rather than put them under the bed and claim the dole, and we need to make it absurdly easy for the few hiring employers to do so.

I agree that this is an important question. As the Irish labour market was overheating for so long, we do not have much useful recent data on incentives to work.

With jobs so scarce, a tough love policy may not achieve much at present except reducing consumption and pushing more people into a negative-equity trap.

We are confronted, once again, with what I call the Galbraithian paradox that to be economically active the rich demand much, much more money, while the poor are expected to make do with much less than they enjoyed previously. At times when the general level of demand is deficient and falling the State has to be the spender and investor of last resort. In the current crisis almost all governments have attempted to fulfill this role – it’s just Irish luck to have the outlier in charge.

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