One of the stock answers students are encouraged to make when describing the pitfalls of high inflation is its link with increasing the burden on the poorer sections of society. The argument goes that periods of high inflation are not traditionally matched by an equal increase in benefit payments. This has not been the case in recent years in the UK - benefits have been rising at a faster rate than inflation, even during its upwards blip of recent years. Now the argument has reverted to one of how the cost of benefit payments have become excessive for a Government attempting to reduce its deficit and bring spending under control. Reports by the BBC and covered by the Guardian today have suggested that the Government is about to break this link.
By reducing the link to inflation the Government hopes to reduce some of its costs - but is this something that the wider public will see as fair? Average earnings are not increasing at the same rate as inflation so those who are in paid employment are already feeling the pinch when it comes to consumption and might feel that those without jobs are no more worthy of an inflation-beating increase. However, unemployment benefits are considerably lower than average wages so the move will lead to a reduced 'real income' of a group within society who are already relatively poor and could 'fatten' out the Lorenz curve analysis of inequality within the UK. The Government have regularly argued that the burden of deficit reduction should be carried by a wide cross-section of the community and will point again to the controversial reduction or removal of Child Benefit payments to higher-earning families that is about to come into play in January 2013 as an example of how they are attempting to spread that load. The other big question is how much further strain this policy would put on the relationship between the Coalition partners as the Liberal Democrats are unlikely to view this policy favourably.