Inflation hits pensioners and the poor hardest

Financial News

Rising inflationPeople on lower incomes, including pensioners, have been hardest hit by inflation over the past 10 years.

An Institute of Fiscal Studies (IFS) report has said that between 2008 and 2010 the poorest 20% of households suffered an average annual inflation rate of 4.3%. In contrast the rate of inflation suffered by the wealthiest 20% was just 2.7%.

The reason for this disparity lies in the different goods and services that we buy. Although there are two main measures of inflation CPI (Consumer Price Index) and RPI (Retail Price Index) we all actually suffer a different rate of inflation.

People on lower incomes spend a greater proportion of their income on gas, electricity, food and fuel, all of which have risen sharply in price. In 2009 for example, the poorest 20% of households spent 9.4% of their incomes on household fuel, the richest 20% spent only 4.4%. Who does inflation hit the hardest?

Conversely people with higher incomes have benefited from low mortgage interest rates. Many people with variable rate mortgages have seen their monthly payments reduce significantly as the Bank of England keep interest rates low in an attempt to stimulate economic recovery.

Peter Levell from the IFS said, “that poorer households will have fared worse over the period of the recession than poverty and inequality statistics that don’t account for these differential inflation rates would suggest.”

As inflation has risen over recent months pensioners, particularly those who rely on just a State Pension have been hardest hit. Those people relying on fixed incomes, perhaps from a level Annuity, have also been hit hard as the real value of their income has fallen.

The problem has been compounded for savers who not only have to contend with rising inflation but also historically low interest rates which has meant savings growth in many cases has not kept pace with inflation.