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Whip Inflation Now?!

I see some fuss over the wage data (again)… but I’m not convinced, especially since this happened earlier in the year and it was a false “dawn”.  Declaring my bias: I want to believe there is still a massive hole in labour supply, either in the form of unemployed workers, or workers not getting enough hours.  Hence, we still have a significant output gap, and we can expect to see unemployment fall to somewhere near 5%.  Fast wage growth now would be a disconfirmation of labour market slack, so in a sense it is not what I “want” to see.  (I also prefer that we’d had a macro policy since 2008 which had aimed for 4% wage growth and avoided large shocks to unemployment.)

Martin Weale and others are citing survey measures of pay settlements.  I don’t see any reason to trust that over the ONS data.  But the ONS labour market update for 2014 Q3 gave us a spike in the 6m growth rate:

Private Sector Regular Weekly Earnings

Private Sector Regular Weekly Earnings. Source: ONS KAI7

That measure is clearly quite volatile.

The annoying thing here really is the “policy-based evidence-making” by Weale (et al), who has spent the last four years cherry-picking whatever data best supports his preferred policy of higher interest rates.  In 2011 Weale told us to look at the GVA deflator, in 2013 the excuse was unit labour costs, and in 2014 the excuse is that he spoke to some business owners who said wages were rising.  And by the way in 2014 the GVA deflator is running below 2% y/y and unit labour cost growth is around 0%.

Anyway, here are trends and levels for private sector regular weekly wages:

UK Nominal Average Weekly Earnings vs Trends

UK Nominal Average Weekly Earnings vs Trends. Source: ONS KAI7 , KAI7

That tiny spike is enough to warrant rate rises?  Really, that’s the best argument there is?  We also have the quarterly estimates of hourly earnings, with the update to the “EARN08” table, although this survey measure excludes very high earners:

ONS Quarterly Hourly Earnings Estimate (Table EARN08)

ONS Quarterly Hourly Earnings Estimate (Table EARN08). Source: ONS EARN08 table

Again… there is no “inflation”.

  1. ChrisA
    November 16, 2014 at 10:29

    BM – don’t you find it funny? On the one hand we are being constantly told that no further easing is possible since we are at the zero bound and we should forget further QE as it had no effect, but that interest rates must be hiked immediately since we are on the cusp of hyper-inflation. Well which is it?

  2. jamesxinxlondon
    December 11, 2014 at 21:12

    What is Carney talking about?
    “What that means though, for this economy to have balance and inflation to get back to two per cent over the next few years is that is going to mean in all likelihood, in our opinion, that interest rates are going to have to increase.”
    Targeting normal interest rates? That’s a novel monetary policy. Hopefully he’s not falling for the nonsensical idea we need higher rates to bring on higher inflation. It would surely bring about an inverted yield curve and have the usual corollary of a recession.

    • December 11, 2014 at 21:59

      That’s a daft thing for a central bank Governor to say! It would make sense if the inflation forecast had them overshooting… but they expect to undershoot!

      You said elsewhere: Q3 NGDP figures are good – really very good! Also RPI inflation expectations have now returned to 3% after the mid-October crash – lots of good demand-side news. A bit of a puzzle why the labour market was flat in Q3.

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