Posts Tagged ‘wage inflation’

Back in the day, real wages used to go up.

The days of ever rising wages may have come to an end some time ago, but during the boom years it didn’t really matter, because house prices went up. Who cared if wages only rose by a couple of per cent when our houses rose in value by a few thousand pounds every month?

But when recession bit in the UK in 2008 something odd happened. In terms of disposable income, the average Brit became better off. The average Brit, of course, had a mortgage and as interest rates headed to near zero, Brits with mortgages were laughing.

It wasn’t so funny if you lost your job, but then most Brits didn’t.

But then, as the recession came to an end, another odd thing happened. Inflation rose sharply, but wages didn’t. So to recap, during the recession most of us became better off, but during the recovery we were worse off.

And every month since April 2010, inflation – according to the retail price index – has exceeded rises in average wages.

Part of the problem is that inflation has proven to be stubborn. The other part is that wages have not been rising like they used to. In the year to April 2010, for example, wages including bonuses rose by 4.4 per cent. Alas they have increased by less than 3 per cent every month since.

Take the latest data. This morning the latest inflation numbers were out – this time for November. They were disappointing.

Another disappointment occurred a month ago too, when inflation – as measured by the CPI Index – rose from 2.2 in September to 2.7 per cent in October. Core inflation – that’s without food, energy and tobacco – rose from 2.1 to 2.6 per cent, and the RPI version of inflation rose from 2.6 to 3.2 per cent.

Never fear we were told. Next month will be better. Well this morning was next month, and it wasn’t, or not much.

Both CPI and core inflation stayed on hold, while RPI fell a smidgen to 3.0 per cent.

Last week the latest figures on wage inflation were out too. In the three months to the end of October average wages with bonuses rose by 1.8 per cent. Look at October in isolation and the numbers look even worse – average wages with bonuses were up by just 1.3 per cent in the year to October. To recap, RPI Inflation was 3.2 per cent in October.

So another month goes by and, allowing for inflation, wages fell.

The snag is that this time last year, many economists were predicting something quite different. They forecast that during the course of 2012 inflation would fall sharply, wages would rise, real wages increases would thus go positive, and UK consumers could then afford to start spending more, pushing up GDP.

It just ain‘t happening.  And now even the most doveish of economists are admitting that inflation may not fall back any time soon.

So what does it boil down to?

Quite simply we have to wait quite a while longer before wages start to create the foundations for economic recovery.

PS. As an aside, central bankers across the world – except in the euro that is – are coming around to the idea of changing the way central banks target inflation. And by the way, the Bank of England’s next governor Mark Carney is very much taking part in the debate. They are now talking about targeting what’s called nominal GDP – that’s GDP not allowing for inflation. So take the UK, up to now the Bank of England has targeted 2 per cent inflation. It hasn’t had much luck of late, but that’s been its aim. So if inflation was 2 per cent and growth 3 per cent, that meant nominal GDP growth would be 5 per cent. But in recent years growth has been nearer zero. The big idea being considered is that central banks should target nominal growth of around 5 per cent, meaning that if real growth is zero, inflation would be 5 per cent. The idea, of course, is that by doing this, GDP would rise. But here is the irony. At the moment, as was explained above, it is looking as though inflation is what’s stopping us from having sustainable growth. So it is all very well, saying let’s have a little inflation in order to create growth. The story of 2011 and 2012 is that a little inflation is what has been stopping growth.

©2012 Investment and Business News.

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