Inflation and the Great Train Robbery

Aug 15, 2012   //   by Keith McDonald   //   Breaking News, Commentary / Editorial  //  3 Comments

The unexpected rise in inflation announced for July, on the face of it, shouldn’t offer too much to panic about. And yet it has, since most train fares are now expected to rise by at least 6% in the New Year, while some could rise by up to 11%.

The Consumer Price Index measure of inflation rose to 2.6% in July, from 2.4% in June, while the Retail Price Index measure leapt to 3.2%. The modest rise in CPI inflation has been attributed to the cost of air fares, which rose by over 20% during Euro 2012 and in the build-up to the Olympics.

Naturally, residual concerns about the squeeze in living standards are being reprised. It’s hardly encouraging to see inflation climbing while wage inflation remains low. And it’s yet another blow for savers, who had only recently been able to make real-term gains from the best instant-access savings accounts.

Perhaps reassuringly, the upwards pressures are not all-encompassing. It’s not so much the price of food or petrol that is propagating this rise (contrarily, the price of petrol has fallen); rather, it’s the cost of flying during a summer laden with high-profile sporting events.

Inflation Chart July 2012

Going Off the Rails (on a Crazy Train)

Breathe easy, then? Unfortunately not. For future pricing structures determined by inflation, and notably rail fares, it seems that commuters have been dealt a hugely unfortunate card.

Owing to government policy, the (traditionally higher) RPI measure of inflation determines part of the price increase of regulated rail fares that are implemented the following January.

So now, most train operators will now be able to hike regulated rail fares, including season tickets and saver tickets, by the RPI measure of inflation plus 3% (currently 6.2%). What’s more, they will be able to raise the prices for particular journeys by an additional 5% (a maximum of 11.2%), provided that they make some cuts elsewhere.

With companies like FirstGroup bidding £5.5 billion to wrest the West Coast franchise away from Virgin, not long after reneging on their £800 million responsibility to the taxpayer from the Great Western route, unions are in little doubt that prices will soar while service plummets.

This crazy franchise lottery, where the highest bidder scoops the pot, means that passengers will have to pay inflation-busting fare rises on the busiest line in the UK for the next 14 years.

We already pay the highest rail fares in Europe and this cockeyed lottery means they will only go even higher in the future.

Manuel Cortes, Head of the Transport Salaried Staffs Association Union

So, given this broader and rather disturbing context, a modest inflation rise has developed into a calamity. Yesterday saw rail passenger groups and unions rushing to protest against the prospective price hikes.

The Great Train Robbery? Which4U Investigates

As This Is Money has shown, season tickets into London from neighbouring counties cost up to ten times more than equivalent journeys in other European countries.

And having personally marvelled at the Swiss train system during a spell living in the country (not cheap, but punctual and spacious), it is difficult to comprehend how a system that is already undermined by an incredulous disparity between price and service can justify such eye-watering rises year-on-year.

While many press reports have already looked at the cost of season tickets into London, we’ve looked into the prospective rise in cost of a few single journeys and compared them to alternative methods of transport. The results show that train travel extends its margin as the ultimate robbery.

Great Train Robbery
Which4U: The Great Train Robbery. Select image for full view (in a new tab).

Notes

  • The calculations for train, coach and plane rely on ‘walk-on’ fares, for the day of travel, accurate to 14th August 2012.
  • Car journeys are based on a Ford Fiesta, with an estimated average MPG of 32.1 for 2013. Petrol prices are set at 133.77p per litre, according to the AA’s June Fuel Price Report.
  • Train fares reflect a rise of 6.2%, the minimum expected average for regulated fares. For methodological parity, coach and plane fares reflect rises of 5.3% and 7.3% respectively, according to the July’s RPI reference tables for transport.
  • Journey cost by car is kept level, on the basis that petrol is currently deflating at 1.8%, while the cost of car maintenance is rising by 1.9%.

Mind The Gap!

Given ‘on the day’ fares, travelling by train is the most expensive option for three of these four routes. And if an ‘anytime’ fare was purchased between London and Manchester rather than an off-peak ticket, the projected £157 would, once again, prove more sky-high than the cost of flying.

For all journeys except Glasgow, the cost of the train is double that of driving. And even for this exception, it’s over £50 difference next year.

Though it takes much longer, it’s startling how much more economical the coach proves to be. In the case of the London to Birmingham route, the train costs six times more.

And the minimum expected average of 6.2% in train fare increases is already likely to eclipse all other forms of transport and further widen the divide, and that’s before the prospect of an additional 5%.

While plane fares here reflect a 7.3% rise as listed in July’s RPI listings, this figure is undoubtedly distorted by the exceptional rise from June to July, and is unlikely to reflect a broader pattern of price increases into 2013. The Consumer Travel Alliance calculated that average air fare inflation in the US was 4.8% in the first quarter, which may be more realistic.

Of course, these comparisons are merely a litmus test. Getting to and from airports can be time consuming. Coach travel, for all its economy, can take twice as long as the train. And, importantly, return train tickets are often not a great deal more expensive than single tickets, which changes the complexion of this analysis.

Nevertheless, the point is there to be made. A steep increase for rail travel further compromises the flexibility of the labour force, with fares set to rise far beyond wage inflation for successive years. And the government’s uncompromising intention to prioritise income above all else suggests that any attempts to limit the rise are not likely to be successful.

Please mind the gap between the price and reality. Thank you for visiting us at Which4U, and we hope to see you again in the very near future.

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  • http://www.inflationmonkey.blogspot.com/2012/01/special-offer-train-tickets-at-1987.html Inflation Monkey

    Over the last 25 years, UK train fares have generally increased inline with UK average salary growth. This is very different to the trend with RPI were train fares increases much faster. From all the news headlines recently, you would have thought that train fares were racing ahead from wages for the last 10 years. It was only since 2010 that train fairs have consistently increased faster than wages, mainly due to average wage growth slowing significantly.

    So relative to wages on average train fares are only slightly more expensive as they were in the late 1980s, as it can be see from the chart which show the relative compounded growth of average train fares and average wages since 1987 at the reference below.

    Reference:
    http://www.inflationarypressure.com/customchart1987/Graph%20of%20price%20of%20Rail%20Fares%20against%20Average%20Earnings%20Index%20showing%20inflation.html

  • http://blog.which4u.co.uk/keith-mcdonald Keith McDonald

    Thanks for a lucid and informative comment; a good point well made. I was never suggesting that the recent rises had long historical precedent, and your graphs make very interesting viewing. The case for affordability, justification, and value are different kinds of argument, I think. After all, even if train fares are only slightly more expensive relative to wages now than 25 years ago, that can still prove regressive for the less well-off, and especially so at the moment. And there can be little doubting that the average wage index is distorted both by region and by the very rich whose wealth keeps increasing at a faster rate.

    We might ask, from an environmental concern, how train fares can be allowed to rise above inflation when same day air-fare is already cheaper. But as your article points out, there’s certainly inefficiency to account for (RailTrack swallows vast amounts). There’s also the downright ridiculous, while companies are accepted to provide franchises at massive sums that only encourages the highest rises in fares combined with cut-backs in service.

    So, very much, I accept your point that inflation should not be the key determinant of headlines into the railway industry. (And we’ve made sensible estimates rather than bombastic ones for price rises in all cases.) But I’m sure we’d both agree that there remains palpable ills within the industry that will make bad press burgeon at this time.

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