Economic outlook: Britain has exorcised the inflationary demons of our past

Globalisation has reduced workers’ bargaining power around the world


The big economic news last week was the decision by the US Federal Open Market Committee (FOMC) to continue with its asset-purchase program of $85bn (£53.32bn) a month made up of $40bn of Treasuries and $40bn of mortgage-backed securities despite the evidence that the US economy is slowing.  It is clear to everyone that the committee was absolutely right to not taper at its last meeting: expectations are that tapering won’t start for some time and if the US economy continues to deteriorate, the next move could be to do more quantitative easing, not less.

There was evidence from the latest, delayed labour-market release that job creation had slowed, with private-sector payrolls up by a less-than-expected 148,000 in September. Slowing in the labour market was confirmed by the latest ADP National Employment Report which again was soft at 130,000 in October, broadly in line with expectations. 

Mark Zandi, chief economist of Moody’s Analytics, argued that “the government shutdown and  debt-limit brinkmanship hurt the already-softening job market in October.  Average monthly growth has fallen below 150,000.  Any further weakening would signal  rising unemployment”.

   The government shutdown appears to have also resulted in a major hit to consumer confidence; the Conference Board’s consumer confidence index, that had declined moderately in September, declined sharply in October.  The index now stands at 71.2 (1985=100), down from 80.2 in September. The present situation index decreased to 70.7 from 73.5, while the expectations index fell to 71.5 from 84.7 last month.

The concern, of course, is that a slowing US economy spills over and chokes off the early stages of recovery we have seen in the UK economy, just as it did in 2008. 

Declines in consumer confidence in the US presaged similar declines in consumer confidence in Britain, just a few months later.

Of interest also was the publication by the Bureau of Labor Statistics of real hourly and weekly earnings data in the US which by rose by  0.9 per cent on the year. This contrasts with the UK where real earnings are falling at around 2 per cent per annum. The other number of note was the US consumer price index (CPI) for September which rose by 1.2 per cent on the year compared with a 2.7 per cent rise in the CPI in the UK which is the highest rate of any major Organisation for Economic Co-operation and Development country (eg. Australia 2.2 per cent; Germany 1.4 per cent; France  0.9 per cent; Netherlands  2.4 per cent; Italy 0.9 per cent; Sweden 0.1 per cent; Greece -1.1 per cent). 

So the FOMC is loosening monetary policy with real wages growing at 0.9 per cent with an unemployment rate of 7.2 per cent and a youth (under 25) unemployment rate of  16 per cent. At the same time, the Bank of England’s Monetary Policy Committee (MPC) is sitting on its hands with real wages falling at  2 per cent with an unemployment rate of 7.7 per cent which is set to rise over the next couple of months and a youth unemployment rate of  21 per cent. Plus the US economy grew by 6.2 per cent over the last three years for which we have data, compared with 2.5 per cent in the UK. Unsurprisingly the pound continues to appreciate. Interesting. 

Over the last year the CPI has been pushed up by government or regulatory decisions and once you take those out inflation is below the MPC’s target of 2 per cent. In its February 2013 inflation report, the MPC estimated that the contribution of these administered and regulated prices in the fourth quarter of 2012 amounted to 0.8 per cent, made up of 0.4 per cent from education due to the tuition fee rise; 0.1 per cent due to electricity, gas and other fuels and 0.4 per cent to “water supply; passenger transport by road and by rail; sewerage collection; dental services; and air passenger, alcohol, road fuel, tobacco and vehicle excise duties and insurance premium tax”.

The other main drivers of inflation have been meat, fruit, vegetables, alcohol, tobacco, electricity, gas and air transport. On the year the price of education is up 21.4 per cent. But some prices have gone down including photographic equipment, housecontents insurance, etc.

When prices of a product rise consumers can switch what they buy; if the price of red wine rises, then buy white wine and so forth. The difficulty arises with basic products like food and fuel as there are no close substitutes. Some price rises can be avoided, including the rise in tuition fees which discourages youngsters from going to college and likely raises the youth-unemployment rate. Most people though are not directly impacted by the tuition-fee rise. The quality of some goods, especially electronics, rise and that improvement is adjusted for using so-called hedonic methods. The reality is that people can’t easily calculate the inflation rate in their heads.

The graph puts the recent inflation experience into historical context. It reports two centuries of data, from 1812 through to 2012 on a composite index constructed by the Office for National Statistics based around the retail price index which is 3.2 per cent currently. It makes clear that the current inflation “problem” bears little relation to the inflation problems of the past.

For the first 100 years of highly volatile data, bouts of high inflation were followed by major deflationary spells. The pre-First World War spike in inflation was followed by deflation in 1921 and 1922. Since then there have been four major spikes hitting a high of 16.8 per cent in 1940; 24.2 per cent in 1975; 18.0 per cent in 1980 and 9.5 per cent in 1990. Deflation occurred in every year from 1921-1933 with the exception of 1925 and then did not happen again until 2009.

It is quite clear that the days of high inflation have gone and Britain has clearly exorcised its inflationary past; this is nothing like the 1970s or 1980s and since 1990 the series averages 3.3 per cent. Globalisation has reduced workers’ bargaining power around the world; union density rates have fallen internationally. Inflation is no longer the great demon, but it is true that energy and food price rises really do hurt as there are no close substitutes. The Government could help, especially with energy prices, but that’s for another day.

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Business Intelligence Consultant - Central London - £80,000

£65000 - £80000 per annum: Ashdown Group: Business Intelligence Consultant - C...

SEN Teaching Assistant

£70 - £85 per day: Randstad Education Group: SEN Teaching Assistants needed in...

Year 4 Teacher required for 2 terms

£21500 - £35000 per annum: Randstad Education Cambridge: Randstad Education ar...

Accounts Assistant - Sales Ledger, Sage Line 50 - St Albans

£20000 - £22000 per annum + benefits: Ashdown Group: A highly successful and w...

Day In a Page

Read Next
Dance yourself happy: strutting their stuff is, apparently, better for people than visiting the gym  

How should we measure the 'worth' of our nation?

Dan Holden
An Ottawa police officer runs with his weapon drawn outside Parliament Hill in Ottawa  

Ottawa shooting: Canada’s innocence is not lost — unless we want it to be

Jake Heller
How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?

A crime that reveals London's dark heart

How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?
Meet 'Porridge' and 'Vampire': Chinese state TV is offering advice for citizens picking a Western moniker

Lost in translation: Western monikers

Chinese state TV is offering advice for citizens picking a Western moniker. Simon Usborne, who met a 'Porridge' and a 'Vampire' while in China, can see the problem
Handy hacks that make life easier: New book reveals how to rid your inbox of spam, protect your passwords and amplify your iPhone

Handy hacks that make life easier

New book reveals how to rid your email inbox of spam, protect your passwords and amplify your iPhone with a loo-roll
KidZania lets children try their hands at being a firefighter, doctor or factory worker for the day

KidZania: It's a small world

The new 'educational entertainment experience' in London's Shepherd's Bush will allow children to try out the jobs that are usually undertaken by adults, including firefighter, doctor or factory worker
Renée Zellweger's real crime has been to age in an industry that prizes women's youth over humanity

'Renée Zellweger's real crime was to age'

The actress's altered appearance raised eyebrows at Elle's Women in Hollywood awards on Monday
From Cinderella to The Jungle Book, Disney plans live-action remakes of animated classics

Disney plans live-action remakes of animated classics

From Cinderella to The Jungle Book, Patrick Grafton-Green wonders if they can ever recapture the old magic
Thousands of teenagers to visit battlefields of the First World War in new Government scheme

Pupils to visit First World War battlefields

A new Government scheme aims to bring the the horrors of the conflict to life over the next five years
The 10 best smartphone accessories

Make the most of your mobile: 10 best smartphone accessories

Try these add-ons for everything from secret charging to making sure you never lose your keys again
Mario Balotelli substituted at half-time against Real Madrid: Was this shirt swapping the real reason?

Liverpool v Real Madrid

Mario Balotelli substituted at half-time. Was shirt swapping the real reason?
West Indies tour of India: Hurricane set to sweep Windies into the shadows

Hurricane set to sweep Windies into the shadows

Decision to pull out of India tour leaves the WICB fighting for its existence with an off-field storm building
Indiana serial killer? Man arrested for murdering teenage prostitute confesses to six other murders - and police fear there could be many more

A new American serial killer?

Police fear man arrested for murder of teen prostitute could be responsible for killing spree dating back 20 years
Sweetie, the fake 10-year-old girl designed to catch online predators, claims her first scalp

Sting to trap paedophiles may not carry weight in UK courts

Computer image of ‘Sweetie’ represented entrapment, experts say
Fukushima nuclear crisis: Evacuees still stuck in cramped emergency housing three years on - and may never return home

Return to Fukushima – a land they will never call home again

Evacuees still stuck in cramped emergency housing three years on from nuclear disaster
Wildlife Photographer of the Year: Intimate image of resting lions claims top prize

Wildlife Photographer of the Year

Intimate image of resting lions claims top prize
Online petitions: Sign here to change the world

Want to change the world? Just sign here

The proliferation of online petitions allows us to register our protests at the touch of a button. But do they change anything?