Families’ 5% Inflation Heaps Election Pressure on Cameron

A dive in Britain’s inflation rate is masking unwelcome news for Prime Minister David Cameron.

People’s experience of prices varies, depending on income levels and whether they have children, according to a model devised by economist Michael McMahon at Warwick University in central England. While overall inflation slowed to 1.6 percent in July, a couple on an average wage with two children saw their cost of living jump as much as 5 percent over the past year.

With the general election less than nine months away, Cameron is struggling to turn a strengthening economic recovery into votes as inflation outpaces wages for a seventh year. His Conservatives trail behind the Labour opposition by as much as 5 percentage points, casting doubt over whether they can win the marginal districts needed for a parliamentary majority.

“The recovery may be taking place but are you getting left behind? That’s the argument,” said Joe Twyman, head of political and social research at polling company YouGov Plc. “The average voter is interested in the broad idea of are they better off than they were, are they going to get better off.”

Living standards are also at the center of policy discussions at the Bank of England, where officials divided over interest rates this month for the first time since 2011.

Labour Shift

For Martin Weale and Ian McCafferty, who voted for an increase in the cost of borrowing, wages are set to pick up. They were outvoted by a seven-strong majority including Governor Mark Carney who argued that pay pressures remain weak. Traders expect the BOE to keep the benchmark rate at a record-low 0.5 percent until May, Sonia forward contracts show.

The pound was little changed today and traded at $1.6577 at 9:41 a.m. London time. The yield on the 10-year gilt fell four basis points to 2.48 percent.

As the economy heads for its best year since the financial crisis, Labour has shifted strategy, abandoning its argument that government budget cuts are harming growth and focusing instead on what it what it calls the “squeezed middle” experiencing the biggest drop in real incomes since Victorian times. The average weekly wage has risen by less than 7 percent since Cameron took office in May 2010, while consumer prices jumped 12 percent amid a surge in energy costs.

Labour’s message is aimed at middle-income voters in swing districts, where no party has a big majority. They include suburban areas such as Bolton West, near Manchester, as well as Derby North in the English Midlands where incomes for full-time workers were close to the U.K. average of about 27,000 pounds ($45,000) last year.

Tory Target

The Conservatives, who govern in a coalition with the Liberal Democrats, need to add 20 such seats to their 2010 tally of 306 to win an outright majority in the 650-member House of Commons.

A 32 percent surge in the cost of education since the government allowed universities to triple tuition fees in 2012 explains much of the extra burden on families with children, McMahon said.

While students can take out government loans to cover the cost of tuition, “the middle classes” with university-age children are helping out to a significant extent, he said.

“Education is so wildly out of kilter with the rest of inflation,” McMahon said in a phone interview. “We’re seeing double-digit increases in those prices.”

The analysis contains some good news for Cameron. For households on low incomes, inflation may be as low as 1 percent, helping the Tories fight Labour claims that the government helps the wealthy at the expense of the least well off.

Achilles’ Heel

Low-paid households spend a larger proportion of their income on food and clothing, the prices of which have fallen over the past year.

Voters in Scotland will decide next month whether to break away from the rest of the U.K., and uncertainty over the general election is adding to the political risks facing investors.

Should Cameron win a majority in 2015, he’s pledged to hold a referendum on whether to leave the European Union. Labour has vowed to freeze energy prices, increase corporation tax for big companies and reinstate a 50 percent top income-tax rate.

“The economy is still the area in which the Tories are winning but they’re by no means infallible,” Twyman at YouGov said. “The issue of fairness and getting left behind is their Achilles’ heel.”