Mark Wadsworth

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Embedded rents

The ONS published a fine survey today, which confirmed what we all knew – that the cost of living in London is higher than elsewhere, even if you exclude rents.

What’s nice is that they give a breakdown of the relative price differences in various categories. As I’ve always said (having observed it in real life but never seen detailed numbers), goods which are harvested or manufactured thousands of miles away and which can be easily transported round the country cost much the same wherever you are – but goods and services which have to be consumed at or near point of purchase include ’embedded rents’. So an item of clothing in Primark costs the same in Oxford Street as in High Street, Anytown (see here or here); but a pint of beer in Oxford street costs £1 more than the UK average.

I reworked the figures in Table 2 to show how much more expensive things are in London (the highest rent area, having the highest concentration of people and transport infrastructure – the two main drivers of rental values or land values) and ranked them from lowest to highest:

Communication – 0.0% (1)
Alcohol & tobacco – 1.6% (2)
Transport – 3.5% (3)
Food & non-alcoholic beverages – 7.2%
Clothing and footwear – 7.2% (4)
Household and housing services – 9.4%
Furniture & household goods – 11.6% (5)
Recreation & culture – 14.1%
Miscellaneous goods & services – 14.4%
Restaurants & hotels – 16.5%

(1) BT and Sky charge the same wherever you are in the country, and in any event it’s much cheaper per person doing cabling, setting up mobile phone masts etc in densely populated areas

2) This is off-licence and supermarket stuff; a pint in the pub goes in the category “restaurants and hotels”. Further, most of the cost of these is duty and VAT, which are the same all over the country. Strip these out and the underlying difference will be higher.

3) A red herring. Public transport is heavily subsidised wherever you are, how much it costs depends on how heavily subsidised it is, and not on usual market forces.

4) “Clothing and footwear” is the only category with “and” instead of “&” in the original press release (screen shot below). I sent them an email about this.

5) The joker in the pack – maybe people in London just buy fancier furniture?
The ONS themselves summarise thusly:

At the division level, there is little price dispersion from the UK average for Alcohol & tobacco, with the price level for all regions close to the UK average (ranging from 98.3 for Wales to 101.3 for London). A high proportion of items within this division were affected by the dominance of large retailers who displayed consistency in their pricing across regions…

Greater price dispersion exists in the divisions that include services, including Restaurants & hotels, Recreation & culture and
Miscellaneous goods & services. This reflects the variance in labour expenses in the regions which make up a large proportion of the total costs in the service industry and also the variability in the cost of renting/leasing outlets across the regions… (6)

6) I love the ONS to bits and everything, but they make a silly mistake here. Higher rents do not ‘push up’ the price of these services – it’s the higher price which people are willing and able to pay for these services which ‘pull up’ rents. Much the same applies to labour costs – where there are more people, there is more specialisation, so everybody is that little bit better at doing a smaller piece of the jigsaw, so everybody earns a bit more so everybody can pay a bit more (relative to more sparsely populated areas).

Here’s the screen shot:


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