FURTHER to the last post on whether the authorities could or should attempt to solve the debt crisis via inflation, there is a new report from the respected Institute for Fiscal Studies on the British experience over the last decade.

The characteristic of recent inflation is that it has been concentrated on food and energy, two items which absorb a higher proportion of the spending baskets of the poor than of the rich. As a result, lower income households tended to experience higher inflation rates than higher income groups over the last decade. The worst rates of all were suffered by the single pensioners. The trends seem to have accelerated; the poorest quintile suffered an inflation rate of 4.3% between 2008 and 2010, the richest 2.7%.

The details refer to Britain but I suspect they have wider implications. The last decade has generally been marked by falls in the relative prices of manufactured goods, which can be made more cheaply in Asia. The better-off may benefit from cheaper flatscreen TVs or iPads but these are beyond the budget of the poorest; worse still they may have lost their jobs in the factories that made these goods.

What this report does not cover, of course, is the effect of higher inflation on the savings of the richest. But this is quite a complex area. The richest only spend around half their income, so consumer inflation only affects that portion; they have more of their savings in equities and property, asset classes that are better protected against inflation, than on the cash deposits which middle-income savers might depend on for the bulk of their interest income.

For Britain in particular, a further bout of inflation might particularly hurt the poor since benefits are now linked to consumer price inflation, which tends to rise at a slower rate than retail price inflation (the old benchmark). While the motivation for this shift was undoubtedly financial (£5.8 billion of savings a year by 2014-15), the government claimed that the CPI better matched the spending patterns on the poor. The IFS comments that

it is not at all clear that one particular index that may have more closely captured the inflation experience of one particular group in the past will continue to do so in the future, unless it is explicitly designed to do so

UPDATE: The US inflation numbers out today illustrate the theme. The headline rate is 3.6%, well above the 10-year bond yield, indicating that real rates remain negative across the spectrum. Now the Fed may focus on the core rate (at 1.5%); that number excludes food and energy, but the poor spend more proportionately on food and energy. To add to the gloom, the Empire manufacturing survey was very weak on measures from new orders to employment. The hope is that this is all linked to Japan and will thus rebound shortly.