View from City Road: RPI should dispel

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The Independent Online
inflation fears Retail sales volume was poor, unemployment and jobs figures were good, but the rise in earnings sounded a warning for some about the sustainability of the recovery. Despite these contrasting threads, the skein is not too difficult to unravel.

The 0.5 per cent fall in retail sales volume in February suggests consumers may be reining back in anticipation of next month's tax increases. They will have had their PAYE codes - and those with mortgages, spouses or company cars will not have found them a pretty sight. Then add in the increase in employees' National Insurance contributions.

Against that small warning of the power of tax increases, the labour market statistics still look good. January's rise in unemployment has been reversed, leaving the trend unchanged at a monthly fall of about 20,000. This is associated not just with a shrinking labour force, but with some pick-up in jobs, mainly among the self-employed, suggesting the economy is growing near its 2.5 per cent trend rate, though the official figures would have us believe it is lower.

However, the labour market numbers reflect what was happening to output some months ago, whereas the retail sales figures may be telling us about a pause in the future. Optimists hope savings will fall enough to sustain consumers' spending, but that does not seem likely without another cut in interest rates.

Nor will the slack necessarily be taken up elsewhere: business stockbuilding could give a stimulus, but this is unlikely to happen if consumers' spending is weak.

The slight uptick in average earnings growth should not put the Chancellor off another rate cut. It would be surprising if earnings were to go on subsiding when they are already so low, and when there is bound to be a cyclical rise in overtime payments and bonuses. This is not yet a crisis.

Indeed, inflation is still lower than most expected, as the latest producer prices showed. Next week's retail price index could help to allay these misplaced fears.