Month: August 2009

Today’s inflation numbers show further falls in July for both the CPI and HICP. The falls sa are not as big as the raw nsa figs. The CPI is now (sa) 6.4% below the October 2008 peak. The HICP, which excludes mortgage interest and some other small items and which I prefer, is 2.6% off its November 2008 peak (sa).

There has been, understandably, considerable reaction to the Bord Snip proposals for cuts in Social Welfare rates. These were increased in last October’s budget by 3.1 to 3.3%, the increases effective from January. In the budget speech, the Minister predicted a positive inflation rate in 2009 of 2.5%. If he had instead predicted a zero rate, it is a fair guess that there would have been no change. It now looks as if the 2009 price level will work out perhaps 5% below what was assumed in the budget. 

If the proposal to cut rates by 5% were to be implemented from January next, the resultant rates in real terms, using the HICP rather than the CPI, would still be ahead of the October 2008 level, even if there are no further falls in the HICP. If the alternative 3% cut were implemented, the resultant rates would leave recipients better off in real terms than they were prior to the October 2008 increase. Of course, the big losers from the recession to date have been those laid off and newly reliant on Social Welfare (apart from ex-billionaires), and not the (far larger) group of long-term recipients.  

Richard Tol and David Madden have posted notes here drawing attention to the distributional impact of relative price changes which deserve a more extended response when time permits. For now, I would just like to make two comments:

(i) David notes that the lowest income deciles smoke cigarettes, and it has long intrigued me that the regressive impact of sharp recent increases in cigarette taxes attracted no negative comment from the political left. They should’nt smoke, you see.

(ii) Even the 5% reduction would still keep real HICP values at about pre-budget levels, if I understand Tol et al correctly. 

Finally, if all the €21 billion gross spend on social transfers were directed at the very lowest income groups, some of the more hysterical reactions would be reasonable (‘destruction of the welfare state’, no less). As a glance at the Household Budget Survey will confirm, significant entitlements reach well up the income distribution, reflecting the presence of substantial universal, as distinct from means-tested, expenditures.

A lot of the recent analysis of the CPI figures on this blog has examined  which households (in terms of poor versus rich) have benefitted most from deflation.  The latest CPI figures released today  (http://www.cso.ie/releasespublications/documents/services/current/rsi.pdf) has prompted me to publish some preliminary results from some work I have been doing which looks at this from a slightly different (though complementary) angle to that taken by Jennings, Lyons and Tol in their recent ESRI working paper.  I have mentioned before on this blog the idea of what is known as the distributional characteristic of a good (or aggregate of goods), which essentially summarises the extent to which consumption of the good is concentrated amongst lower income households.  By calculating this measure we can then see which price changes will have the most impact upon poor (or rich) households.  Calculation of the measure requires detailed knowledge of expenditure patterns across households and this data is available in the Household Budget Survey (and thus unfortunately only be calculated for the years the HBS is carried out).  Some analysis I have done looking at the 2004/2005 HBS suggests the following ranking of goods in terms of their distributional characteristic (a high ranking indicates a good whose consumption is more concentrated amongst poorer households):

1.  Tobacco and Fuel/Light (their values are practically identical)

3.  Food

4.  Non-durable Household Goods

5. Miscellaneous Household Goods

6.  Housing (including mortgage interest)

7.  Durable Household Goods

8. Alcohol

9.  Clothing and Footwear

10. Transport

11.  Services

Unfortunately the classification of goods into aggregates in the HBS tables (http://www.cso.ie/releasespublications/documents/housing/hbs.pdf) does not correspond exactly with that in the published CPI but for many goods it is very close, if not exact.

So, taking this approach, what have been the relative distributional effects of recent changes in the CPI (bearing in mind that all households will benefit from price falls)?  The July fall in clothing and footwear will give greater benefit to richer households relative to poorer ones, given that this consumption of this good is relatively more concentrated amongst richer households (this is true for the broad aggregate though of course may not be so for some individual clothing items).  The fall in fuel prices is definitely very good news for poorer households as this category consistently has the highest distributional characteristic (along with tobacco).  Housing is pretty much bang in the middle in the ranking so the effect of falls in mortgage interest payments is fairly neutral.

It should also be borne in mind that these figures are based upon the HBS from about five years ago but having looked at previous HBS the rankings don’t seem to change much.  I will publish the detailed results in a UCD working paper with more information about the methodology etc in the next couple of weeks.