Making social science accessible

15 Aug 2023

Economy

The Office for National Statistics releases its latest inflation figures tomorrow. Johnny Runge examines the way in which politicians, economists and the media communicate inflation figures, arguing that it can be unclear, especially in the context of the cost-of-living crisis.

The public debate is often dominated by the narrative of crises. They almost always creep up on us, and then sometimes come into public consciousness suddenly, and often through dramatic events. But when is a crisis said to be over?

For some fortunate people, the personal impacts evaporate quickly and may never really come to fruition in the first place. For others, the impacts are frightening and scarring for decades to come.

The ongoing cost-of-living crisis is such a crisis. It impacts people unevenly. At some point in the future, the media and policymakers may stop talking about cost pressures on working families, even when many are still worrying about spiralling costs.

In fact, last month we got a glimpse of this when the Prime Minister Rishi Sunak was interviewed on LBC and said: “When inflation comes back down, it will be completely transformative for how people feel about the situation…If we bring inflation down, people will have more money to spend.”

The Prime Minister indirectly suggested one definition of when we can declare the ‘end of the cost-of-living crisis’. That is, when inflation has come back down, maybe to around 2%, which is the Bank of England’s inflation target, or alternatively when inflation is halved to 5%, which the Prime Minister in December 2022 outlined as one of his five pledges to the British people.

Last month, the latest ONS inflation figures offered some encouraging news, which prompted the Prime Minister’s optimism. Annual inflation in June 2023 was 7.9%, compared to 8.7% the previous month.

The media also covered this extensively. The BBC proclaimed that ‘UK inflation falls to lowest in more than a year’. Other headlines referred to inflation as ‘falling’, ‘dropping’, ‘easing’, ‘cooling’ and ‘slowing’. For instance, The Sun reported that ‘UK inflation drops more than expected to 7.9% in June’.

However, our recent survey, conducted by YouGov, shows that while these headlines are technically true, they are at worst inadvertently misleading, and at best confusing.

When survey respondents in our study were presented with the headline ‘The inflation rate has fallen from 10.1% to 6.1%’, only around half of the UK public interpreted it correctly to mean that ‘prices are still going up, just not as quickly as before’. More than a third of the public believed (wrongly) that it meant prices are falling.

When the Prime Minister says falling inflation will be “transformative” for how people will feel, and that they will “have more money to spend” it plays on this misunderstanding.

The Governor of the Bank of England, Andrew Bailey, took a similar line when he said in a BBC interview: “I do expect inflation to go down, it’s already started to come down and I expect quite a marked fall in inflation…and people will notice”.

But is this likely to be the case?  Research by the Trussell Trust has found that one in seven Britons face hunger, with many more no doubt keenly aware of the rises in costs. Given this, it seems unlikely that the average person will notice that prices are now increasing by slightly less than before, for the simple reason that prices are still rising a lot.

The source of the misunderstanding is that many people, and apparently also politicians, confuse ‘levels’, ‘changes’, and ‘rates of change’.

The level is the price, say £1.00 for a pint of milk – so far, so good. The change in the price level is the inflation rate. Say the pint of milk has increased by 10p in one year to £1.10, the inflation rate is 10%. The change in the inflation rate immediately gets more complicated. Say the pint of milk the following year increases by a further 5p to £1.15. The inflation rate is now 4.5%, meaning that prices have increased by 4.5% in the last year.

This is a lot for prices to rise. In fact, in this example, in the last two years the price of a pint of milk has increased by 15% overall, from £1.00 to £1.15.

But the annual inflation rate fell from 10% to 4.5%. Which the media might report as: ‘Inflation has fallen from 10% to 4.5%, the lowest in two years’. Economists might cheer that the economy is heading back to normal, the Bank of England is getting close to their inflation target of 2%, and the Prime Minister is able to announce that he has delivered on his promise to halve inflation.

The ONS figures themselves are correct and showing exactly what the public would be feeling: prices are rising, just at a slower pace, but still a high one – and on the back of years of dramatic cost increases.

It is understandable if, on this basis, people might question how the figures are collected, whether they are reliable, and ultimately if they can be trusted. The problem, however, is not with the figures, but with the way they are communicated.

The ONS have taken positive steps towards supporting the communication of inflation figures, for instance through creating a Personal Inflation Calculator and by calculating price changes of the lowest-cost grocery items in supermarkets. However, to fulfil their potential, they need to be used by the media and economists when talking about inflation to the public.

Going forward, as the inflation rate hopefully starts heading closer to the Bank of England’s 2% target, economists, policymakers and the media must remember that a 2% inflation rate does not bring normality back for the UK public, when it comes on the back of years of a cost-of-living crisis, especially if people have not received equivalent pay rises.

As we start tackling our inflation problem, let us communicate clearly with the public about inflation. After all, the public live and breathe the economy every day. They, not economists, will know when the cost-of-living crisis is behind us.

By Johnny Runge, Senior Research Fellow, the Policy Institute at King’s College London.

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