Inflation, Inflation, 1.7% Inflation
The UK CPI rate is now down to 1.7% over the twelve months to February 2014, a rambling post follows. It would be easy to point to the falling CPI rate in the UK and the rising CPI rate in Japan, then point and laugh at idiotic UK politicians celebrating falling inflation… my usual cheap gags, in other words.
It’s never that simple, because we still have to care about supply and demand. There is little evidence saying that UK aggregate demand growth has slowed over the last twelve months. There is a lot of evidence that UK aggregate demand is growing faster. Therefore it is something of a challenge that the inflation rate has fallen.
It is possible to argue that holding aggregate demand growth constant the falling inflation rate is mildly positive supply-side news, and we should grasp such news with both hands. This is how 99% of newspaper commentators interpret the inflation data anyway. Keynesians will find some vindication in their view that the inflation rate is related more to the “output gap” than to AD growth, although it comes after six years of UK macro data which generally did the opposite.
Despite some crowing from Tories in the press about the imminent rise of real wages, I see absolutely no indication that hourly wage growth has picked up at all. If anything, wage growth slowed through 2013. It remains hard to get reliable high frequency nominal hourly wage data (see previous post) but I can torture the data to give you this little graph:
The data really is tortured to produce that; I take the series for Average Weekly Earnings Regular Pay and divide by average weekly hours, and then apply a 3-month moving average; using the total pay measure inclusive of bonuses produces an extremely volatile result for hourly wages. Take all this with a pinch of salt. (What do erratic City bonuses imply for stickiness of hourly wages – arguments in the comment section?)
The other supply-side indicator giving me a little doubt about demand-side revival is a slight fall in total hours worked in recent labour market updates. I have said it before, but it is hard to overstate how strong the expansion in the UK labour market has been since 2012. Over the 24 months to October 2013, total hours worked grew 5%. There is no period of employment growth this strong since the Lawson boom in the late 80s. The survey evidence for UK employment this year is looking good so there is hopefully no reason to have doubts about the labour market.