Macroeconomics: UK economy, IB Economics

As a result of the stubborn nature of UK inflation the Bank of England's Chief Economist has indicated that there's little immediate prospect of a summer cut in interest rates.

It seems as though the MPC consensus is that the relative strength of the labour market is an ongoing concern and that this needs to demonstrate greater weakness before rates are cut, even though it seems as though the UK is recovering from recession.  

It's been a long time since I've used an Are You Being Served reference in a Phillip Inman article, but this week could see data releases confirming that the UK economy is 'going down' and entering a recession. Certainly the expectation is that the last quarter of last year will see output shrinking and wage and inflation data are expected to be similarly gloomy.

The pensions triple lock is back in the spotlight, with the news that the government are looking at trying to be a little bit more selective with how it's interpreted. Under conventional rules, given that earnings went up by 8.5% in the three months to July, this should feed through to state pensions. 

However, if you exclude the payment of one-off bonuses to NHS staff and civil servants, this figure falls to 7.9% saving the government around £1bn. I suspect I know what they'll do. 

Wage have caught up with inflation, with both running at 7.8%, meaning that real wages are stable. However, it seems to be the case that the labour market is at an inflection point: there are fewer job vacancies and it seems that unemployment is on the point of picking up. 

Depending on whether members of the MPC see the rate of pay growth as excessive or whether they've got more of an eye on labour market developments played forward will play a big role in determining the future direction of monetary policy, with the MPC's next interest rate decision next week.

The Guardian take on the fall in inflation - it's interesting how economic news is 'narrated' - the view here is that the fall in inflation and a corresponding rise in wages in good news, but that the flip side is the risk of recession and the fact that UK inflation is still higher than that in the US and the Eurozone. 

Another report looking at the impact of long-term sickness on the UK labour force highlights the fact that there are now 2.6 million people not working due to health issues, and all of this comes at a time when unemployment is only 3.8%. No wonder that wage growth is still strong, albeit lagging behind inflation. 

However, more importantly, you might want to think how this would be modelled using AD-AS analysis and the implications of this for macroeconomic objectives. 

An alternative, leftist perspective on the current inflationary environment, that taps into anger about Huw Pill's statement that we just need to "accept we're worse off" and move on. 

Is it price gouging and external supply-side shocks driving inflation rather than wage growth? And equally how might the conduct of monetary policy have contributed?   

The TUC take on 2022 and real wage growth: not a good year! In fact, the TUC research suggests that real wage growth has been at its slowest since 1977.

As if by magic, and a swift challenge to the need for wage moderation, the latest IFS research suggests that pay and bonus deals in the City are rising at around twice the rate of other sectors of the UK economy, driving inequality. 

Whilst the period 2016-2020 saw low wage earners having the fastest wage growth, it seems that the last 18 months has seen the UK economy revert to the pattern of the latter part of the 20th century. 

The latest labour market data has been released and is in line with expectations: unemployment down to 4.1%, job vacancies up, again, and falling real pay between October and December, with the rate of wage growth lagging behind inflation.

It appears that there's considerable wage growth - and what does this imply for the UK economy? However, what I would add is that I suspect that when you are looking at 'starter salaries' you may well be looking at graduate jobs and not the sorts of jobs that are being done by the low paid. 

In the first place, I doubt KPMG would sully their hands looking at this occupations, and if you read the article note that it refers to accountants and lawyers, not hospitality and in the gig economy. Thus, does it paint a representative picture? 

The Guardian's take on the latest unemployment data - black cloud, silver lining and a begrudging acceptance of record levels of employment.

The latest unemployment data is a bit of a mixed bag: unemployment itself is marginally up, but in common with a lot of the recent figures within the margin of error; however, wage growth is at its highest in 11 years. 

Employment is at its highest since records began - in 1971 - at 76.1% and this is something trumpeted by the government, and, overall, there seems to be a degree more optimism about the state of the economy in the light of these figures. It will be interesting to see where next quarter's GDP is headed. 

Richard Partington with his take on 14 years of Conservative government. Unsurprisingly, it's not terribly complimentary. 

The Observer seems to have accepted the view of Nomura's Chief Economist, George Buckley, that the Bank of England is likely to hold interest rates this week in the light of a slew of data suggesting that labour markets are weakening, consumer confidence ebbing away and growth slowing, even though inflation remains troublesome at 6.7%.

Indeed, it seems that for many market observers, those who thought the economy was remarkably resilient, may have overplayed their hand. 

Phillip Inman on today's interest rate decision: he argues that it signals the end of interest rate hikes because of the current state of the UK.

He's of the view that upcoming economic data, reflected in the MPC Report which notes a weakening housing market, and suggests that wage growth has been overstated, is likely to indicate that further rate rises would damage the economy. 

Adam Posen writes in the Observer about the unique nature of inflation in the UK, and how a variety of factors mean that getting it back to target is likely to be harder than achieving the same in the US and the EU.

He argues that the patterns of recent wage growth, and the lack of wage growth in certain key sectors, Brexit, the unusual nature of UK energy markets, and a lack of certainty as regards policy, not least fiscal policy, have all played a role in meaning that getting core inflation down in going to be harder than elsewhere.  

And with the latest labour market data today, it seems self-evident that monetary policy is going to be tightened again, meaning higher interest rates going forward and bad news for mortgage borrowers going forward. 

And if it's bad news for them, it's bad news for consumer spending, and, by definition, the wider UK economy too. 

This article looks at food price inflation in the UK with a particular focus on the cost of producing staples, notably spaghetti bolognese. 

Whereas in the past the cost of making spaghetti bolognese for four usually increases relatively slowly - by 24pn between 2018 and 2022, whereas it's suddenly leapt since then, such that it now costs around £10. 

Phillip Inman writes about the notion being put about by the Chancellor and the Bank of England, arguing that wage settlements are in danger of sustaining inflation. But how true is it given that many people have operated on the basis that when pay increases get above 4% this triggers inflation?

Whilst there have been some instances of workers securing sizeable wage increases, notably Aldi warehouse workers and East Midlands airport security staff - who got a 17% increase. And yet, whilst there's still wage growth, average wages are rising by 6%, well below the 10.7% that inflation is rising at, so what happening?

Interestingly, some people are asserting that one of the reasons for inflation has been the fact that firms have taken the chance to boost their profit margins, something that is supported by empirical evidence from both the US and the UK.

Phillip Inman makes the very valid point that current problems in the labour market aren't demand-side, and thus the fact that interest rates are going to rise, such that the Bank of England is anticipating a doubling of unemployment in the next two years, isn't the solution.

Yes, there might be an uptick in wage growth that could contribute to inflationary pressure, but the fact of the matter is that increasing the labour supply would offset this. 

And then he talks about the economically inactive - including the over-50s who've opted out of the labour market - without mentioning the elephant in the room. Brexit. 

Clear evidence of widening wealth inequality, with the rate of dividend growth outstripping wage growth. To put it in other words - returns to capital are outstripping returns to labour - and some would argue that this is because those people who invest in shares are greater risk-takers. 

After 30 years as an economist, I have to say that share ownership and home ownership don't strike me as the riskiest of activities. 

Given the tightness in labour markets, it's self-evident that wages are going to rise, with a YouGov survey suggesting that the rate of wage growth is going to reach 3% for the year, at least in part because recruiters are struggling to fill the existing vacancies. 

Of course, this would represent a decrease in real pay, given high inflation, 

The latest labour market data suggests the economy is recovering with there being low unemployment, record numbers of job vacancies and strong growth in wages. 

However, drill down into the data and the scale of the vacancies, and the difficulties some sectors are facing in filling them is a concern. Equally, the fact that pay is 7.4% higher than at the same time last year also reflects the furlough scheme and it's unlikely that the underlying rate of pay increases for those people that have remained in full-time employment will be as marked. And think about the implications for inflation too!

Both of these business briefs are worth a good read - the former looks at the distributional effects of low interest rates in Denmark, but it can equally be applied to the UK. It suggests that contrary to what you might think, pensioners have actually done rather well out of a decade of low interest rates. 

The second looks at the latest unemployment and wage data, suggesting that the superficiality of the 'good news' disguises all sorts of factors that imply that the UK labour market isn't quite a strong as you might anticipate.