Inflation and tuition fees

Why count them?

Inflation is set to remain above the Bank of England's 2.0% target, according to today's Quarterly Report from the Bank of England.  The Bank points out that "increases in tuition fees...have added to inflation more recently".   Indeed, the rise to 2.7% in December from 2.2% in September "primarily reflected" increased fees and increased energy bills.  Education contributed on average 0.4 percentage points to CPI inflation in the fourth quarter of 2012.

Because inflation is calculated on a year-on-year basis, it will take many months before the increased tuition fees drop out of the headline inflation numbers.  Although the fees only went up once, you get 12 months of higher headline inflation figures as the comparison is with 12 months earlier.  Moreover, the contribution of fees has been "unexpectedly large".

The benefits of including fees in inflation are unclear, especially given the impact on the index.  The fees system in the UK is complex, and is most accurately described as a time-limited, contribution-limited graduate tax of 9% of earnings above £21,000.  Most students will not over their liftetimes pay the headline 'price' of £9,000.   To be sure, increased fees have an economic impact.  But the effect on purchasing power is much closer to that of increased income tax (which would not directly affect the index, but in the long rung would be deflationary) than increased prices.  Having fees in the index only obfuscates the true level of inflation.