THE BLOG

Inflation Down But Market Failures Still Contribute to 'Cost of Living Crisis'

14/05/2014 11:39 BST | Updated 14/07/2014 10:59 BST

When the latest consumer price figures for April are released next Tuesday (20 May), they are likely to show inflation remained close to the 1.6 per cent rate recorded by the Office for National Statistics in March. This was the lowest rate of inflation in the UK for four and a half years (and the lowest in over nine years if the effects of the temporary cut in VAT to 15 per cent in 2009 are excluded).

With the large increases in employment seen over the last couple of years now starting to create shortages of workers in some areas, there has also been an increase in the growth rate of average earnings in recent months. The result is that earnings in real terms - that is after adjusting for inflation - are no longer falling.

This does not, however, mean that the debate about the 'cost of living crisis' is about to disappear from the headlines. Increases in real earnings over the next year will not be large enough to offset the losses of the last four years. So, the Labour party will keep emphasising the longer-term picture. Meanwhile - just as they did when the GDP growth numbers turned positive - the Coalition will point to expected gains in real earnings over the next year as a sign that its 'long-term economic plan' is working.

Developments in prices - and plans to contain them - are therefore likely to remain newsworthy. This will be particularly true for the prices of those goods and services that have seen some of the biggest increases over the last five years, not least because in many cases these are essential items and the fact that they have been rising rapidly has hit the poorest households hardest. Food, energy and transport prices all come into this category.

The government - and its supporters in parts of the press - label Ed Miliband 'anti-business' when he proposes measures such as a temporary freeze on energy prices or controls on rent increases. But the Coalition has not proved immune to intervening in markets. In recent months, for example, it has asked water companies to look closely at the level of price increases, limited rises in rail fares and announced plans to cap management fees for pensions.

The problem with these interventions - and proposed interventions - is that they are ad hoc and responsive. Government intervention in markets cannot be justified solely on the basis that prices have gone up rapidly, which might be for a variety of reasons. It is necessary to show that attempts to deliver goods and services through competitive markets have failed.

Even when there is evidence of a market failure, increasing competition - reducing the power of oligopolies, increasing consumer information and banning practices designed to exploit consumers - may be the best approach to improve outcomes for consumers.

More extensive interventions should be reserved for those markets where attempts to deliver services through competition have been tried and failed. As a recent report from IPPR has shown, markets like energy, public transport, childcare and housing have been characterised by market failure in the UK for many years. Policymakers need to find alternative ways of achieving a better deal for consumers in these markets, rather than continuing to pursue market-based solutions seemingly oblivious to the factors that make it unlikely they will succeed.

Tony Dolphin is Associate Director for Economic Policy at IPPR