The labour market data out in the past week highlighted two facets of official policy:
The early post-furlough employment data showed that employment had bounced back with 160,000 more workers added to company payrolls during October. The unemployment rate for the three months to September (when furlough still existed but when its impact on the labour market should have been falling off) fell further to 4.3%. Although this was slightly higher than the pre-pandemic rate, it was not much so. Indeed, the highest rate of unemployment registered during the whole pandemic was 5.2% in Q4 2020 – a much lower peak than anyone that I know had predicted.
The other interesting item of data in the labour market release was the data on wage inflation. We need to be a little careful with this because the basis for comparison was the pandemic affected 2020 so year-on-year data may be misleading. Moreover, lower paid workers were dropping out of the labour force at a higher rate during the pandemic which has further contributed to inflated wage growth readings. However, the ONS itself claims that these distortions are unwinding now. The data show private sector earnings up 6.6% in the year to Q3 and total average earnings up 5.8% when including the public sector, whose pay often lags behind. Taken together with the jump in the headline consumer price index from 2.9% in September to 3.8% in October on the CPIH measure, the data on wage and price inflation is powerful evidence that inflationary pressures are taking root.
For a long time, lazy economists have predicted the trend inflation in the following year by subtracting from the rise in private sector wages the rise in trend productivity to give the trend in unit labour costs. These are currently rising at just over 5%.
It is possible that inflation next year will be less than this because some of the peaks in energy, commodity and shipping costs may subside. But it is hard to see inflation in a year’s time anywhere near the Bank of England’s target rate of 2%. It looks as though the authorities are way behind the curve in understanding what is going on in both the goods and labour markets and hence in their understanding of the scale of inflationary momentum.
What is interesting is that the same authorities who played a blinder in designing innovative policies to prevent unemployment rising are the ones accused of losing the plot on inflation. How can this be so?
First, it is not unusual for people to get one thing right and another thing wrong. Approaches to policymaking that can work in one set of circumstances can fail in another. At the start of the pandemic officials worked through the night to deal with a theoretical but real problem – that the economy could wind itself into a deflationary spiral during lockdown, with incomes and employment falling, leading to reduced spending power which would have further exacerbated the problem. They were probably aware that they might pump in too much monetary and fiscal stimulus. But they felt that this was a risk worth taking. My judgement was the same and I think they deserve a lot of credit for this.
Post pandemic, however, they seem to have been slightly unaware of the economic trends. My New Year’s prediction for UK GDP growth in 2021 was 8%. It looks now as if it might come in slightly lower but not far off. Yet as late as March, the OBR was forecasting growth of just 4%. The difference goes a long way to explain the lack of understanding of inflationary trends. Essentially, those economists who only relied on official statistics got it badly wrong. Those who were able to augment the statistical information with an understanding of what was really going on from their own business experience (and some of us have the perhaps unfair advantage of many years of listening to the business vibes and have a sense of how to interpret them) were closer to understanding what was happening. I’m still surprised that Whitehall and the Bank routinely pay so little attention to what the most experienced outsiders think, but that is their choice. Sometimes government statistics and theory are enough. But often they are not and when, as a result, the authorities make policy mistakes, they will receive criticism to go with the deserved praise for when they get it right.
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