The consumer prices index (CPI) is used by the government and the Bank of England for measuring the rate of inflation, and in the 12 months to March 2010 it rose by 3.4%. This figure was above the expected rate of 3.1% and well above the Bank of England’s target of 2%. The other major measure of consumer prices, the retail prices index (RPI) rose by even more – by 4.4%.
In order to recover from the recession, the UK economy needs to grow, but as demand begins to rise, this could put further upward pressure on inflation. There are a number of influencing factors that have caused the recent rise in inflation (see Too much of a push from costs but no pull from demand). Large rises in housing, fuel, transport, many household services and food were contributing factors. Many of these factors, however, are thought to be temporary, so it may not be too much of a problem.
And anyway, at least if inflation does continue to rise, it won’t be unexpected!
Articles
UK inflation rate rises to 3.4% BBC News (21/4/10)
A surprise? Definitely. A problem? Possibly. BBC News blogs, Stephanomics, Stephanie Flanders (20/4/10)
Transport costs push UK inflation above 3pc Telegraph, Edmund Conway (21/4/10)
Data
Latest Inflation data National Statistics Online
Consumer Price Indices portal National Statistics Online
Consumer Price Indices, Statistical Bulletin Office for National Statistics
Consumer Price Indices, time series data National Statistics Online
Retail Prices Index: 1948–2010 National Statistics Online
Questions
- Why might the Monetary Policy Committee have to restrict growth to keep inflation manageable?
- What are some of the causes of rising inflation? Why are expectations so important?
- How is the CPI calculated to measure inflation?
- Normally, during a recession, we would expect economic growth to be poor, but inflation to be low and stable. How can we explain both poor growth and rising inflation?
- “Investors know that the UK government has more to gain from an unexpected bout of inflation than almost any other economy.” Why is this?
With an election approaching, there is much debate about recovery and cuts and about the relationships between the two. Will rapid cuts stimulate confidence in the UK by business and bankers and thereby stimulate investment and recovery, or will they drive the economy back into recession? The debate is not just between politicians vying for your vote; economists too are debating the issue. Many are taking to letter writing.
In the February 2010 news blog, A clash of ideas – what to do about the deficit, we considered three letters written by economists (linked to again below). There has now been a fourth – and doubtless not the last. This latest letter, in the wake of the Budget and the debates about the speed of the cuts, takes a Keynesian line and looks at the sustainability of the recovery – including social and environmental sustainability. It is signed by 34 people, mainly economists.
Letter: Better routes to economic recovery Guardian (27/3/10)
Letter: UK economy cries out for credible rescue plan Sunday Times, 20 economists (14/2/10)
Letter: First priority must be to restore robust growth Financial Times, Lord Skidelsky and others (18/2/10)
Letter: Sharp shock now would be dangerous Financial Times, Lord Layard and others (18/2/10)
Questions
- Summarise the arguments for making rapid cuts in the deficit.
- Summarise the arguments for making gradual cuts in the deficit in line with the recovery in private-sector demand.
- Under what conditions would the current high deficit crowd out private expenditure?
- What do you understand by a ‘Green New Deal’? How realistic is such a New Deal and would there be any downsides?
- Is the disagreement between the economists the result of (a) different analysis, (b) different objectives or (c) different interpretation of forecasts of the robustness of the recovery and how markets are likely to respond to alternative policies? Or is it a combination of two of them or all three? Explain your answer.
- Why is the effect of the recession on the supply-side of the economy crucial in determining the sustainability of a demand-led recovery?
The latest inflation numbers are a joy for headline writers! With the falling price of toys, we can perhaps speak of ‘inflation toying with us’, while the fall in the cost of gas might allow us to say that ‘gas takes the fuel out of inflation’. More generally, the latest inflation figures from the Office for National Statistics (ONS) show the annual rate of CPI inflation falling from 3.5% in January to 3% in February. In other words, the weighted price of a representative basket of consumer goods and services rose by 3% in the 12 months to February as compared with 3.5% over the 12 months to January.
In compiling the Consumer Price Index (CPI), the ONS collects something in the range of 180,000 price quotations over 650 representative goods and services. These goods and services fall into 12 broad product groups. The items to be selected for these groups are reviewed once a year so that, in the face of changing tastes and preferences and changes in the goods and services available to us, the ‘CPI shopping basket’ remains representative. A price index and a rate of price inflation are available for each of these 12 broad groups as well as for goods and services within these groups. So, for instance, we can obtain a price for ‘transport’, then, within this group, we can obtain a price for the purchase of ‘vehicles’ and, finally, a price for ‘new cars’ and for ‘second-hand cars’. This level of detail also means that individuals can calculate their own personal inflation rates using the ONS personal inflation calculator.
So what of the latest fall in the rate of CPI inflation? Well, the ONS reports ‘widespread’ downward pressures. This phrase needs some careful unpicking. Downward pressure is reported from ‘recreation and culture’ because its average price was static in February, but rose a year earlier. Within this group, the average price of games, toys and hobbies fell this year, but increased a year ago and, so, our possible headline ‘inflation is toying with us’. Similarly, downward pressure is reported from ‘housing and household services’ where a fall in its average price this year follows static prices a year ago. A major driver of this change was a reduction in average gas bills and so our other possible headline, ‘gas takes the fuel out of inflation’.
The latest price numbers from the ONS show that some product groups are experiencing long-term price deflation. For instance, while the average price of ‘clothing and footwear’ actually rose in February, when we analyse annual rates of price inflation for this product group, one has to go back to March 1992 to find the last time it was positive! Indeed, within the slightly narrower product group of ‘clothing’, the average annual rate of price deflation over the past ten years has been 6.1%. A similar longer-term trend of price deflation can be found in the product group ‘audio-visual, photo and data processing’. Here there has been an average annual rate of price deflation of 9.9% over the past ten years. So, smile for the camera!
Articles
Rates set to remain at record low as inflation falls back sharply heraldscotland, Ian McConnell (23/3/10)
Inflation data boosts government before budget AFP (23/3/10)
UK inflation rate falls to 3% in February BBC News (23/3/10) )
Inflation slows more than expected Reuters UK, David Milliken and Christina Fincher (23/3/10)
UK inflation falls sharply to 3% Financial Times, Daniel Pimlott (23/3/10)
Inflation rate fell to 3 per cent in February Independent. James Moore (24/3/10)
Inflation falls back to 3% Guardian, Philip Inman (23/3/10)
How soon before we scrap the Bank’s inflation target? Telegraph, Edmund Conway (23/3/10)
Data
Latest on inflation Office for National Statistics (23/3/10)
Consumer Price Indices, Statistical Bulletin, March 2010 Office for National Statistics (23/3/10)
Consumer Price Indices, Time Series Data Office for National Statistics
For CPI (Harmonised Index of Consumer Prices) data for EU countries, see:
HICP European Central Bank
Questions
- Explain the difference between an increase in the level of prices and an increase in the rate of price inflation.
- The annual rate of price inflation for clothing in February was -3.9%. If the average price of clothing was cheaper, year-on-year, how could it have exerted ‘upward’ pressure on the overall rate of CPI inflation?
- What factors might help to explain why, over the past 10 years, the average annual rate of price inflation for audio-visual, photo and data processing equipment has been -9.9%?
- What factors might help to explain why, over the past 10 years, the average annual rate of price inflation for clothing and footwear has been -5.7%?
- What factors might help to explain why the annual rate of ‘new car’ price inflation was 5.4% in February 2010 compared with -0.2% in February 2009?
- What factors might help to explain why the annual rate of ‘second-hand’ car price inflation was 19.0% in February 2010 compared with -15.1% in February 2009? And, are you surprised at the difference in the rates of ‘new’ and ‘second-hand’ car price inflation?
It is often said of statistics that you can make of them whatever you want to. Well, this appears especially true of the latest labour market figures from the Office for National Statistics. Firstly, the good news: unemployment fell. But, secondly, the not so good news: the number of economically inactive individuals rose to an all-time high. So what are we supposed to make of the latest figures? And, are there any other little gems to be uncovered in the latest set of labour market numbers?
At its most simple, an economically active individual is somebody 16 or over who is either in employment or is unemployed but actively seeking work. In the three months to January 2010, the total number of economically active individuals in the UK stood at 31.309 million, of which 28.860 million were employed and 2.449 million were unemployed. The number unemployed in the previous three months had been at 2.482 million. When expressed as a percentage of those economically active, the unemployment rate has fallen from 7.9% in the previous three months to 7.8% in the three months to January.
The total number of economically inactive individuals of working age, i.e. those aged 16 to 59 (women) or 64 (men), stood at 8.157 million in the three months to January, which, as well being an historic high, was a rise from 8.009 million in the previous three months. This converts into an inactivity rate amongst those of working age of some 21.5%, the highest since the three months to October 2004. A key point though is that inactivity rates do tend to rise either during periods of rising unemployment and/or following prolonged periods of relatively high unemployment. For instance, following the early 1990s downturn the rate of inactivity peaked at 22.1% in the three months to January 1995. In comparison, following the boom of the late 1980s the rate, the inactivity rate began the 1990s at only 19.3% – a record low. A large contributing factor to the rise in inactivity in the three months to January has been the rise in the number of students not in the labour market to 2.13 million, an increase of some 98,000 over the three months. Again, parallels can be drawn with the early 1990s because this is the highest number of students not in the labour market since comparable figures began in 1993.
In part, it appears that inactivity levels reflect perceptions amongst individuals of the probability of finding employment. So, while unemployment has fallen by 33,000 over the latest three months we do have to keep in mind that inactivity has increased by 149,000. Therefore, this may be a case of a ‘jobless’ decrease in unemployment!
Some commentators, however, are more optimistic about the current trend in unemployment, pointing to the fact that unemployment levels have not hit the levels predicted, despite the economy contracting by 5% in 2009. They point to the flexible labour market. Of course, time will tell if this is truly a ‘benefit’ of a more flexible labour market. But, what is clear is that one manifestation of a changing structure to the UK labour market is the growth in part-time work. In the three months to January, 26.69% of those employed were employed part-time: this was another record high which seems to have been largely lost in the mass of statistics.
Articles
Unemployment falls as ‘economic inactive hits record’ Telegraph, Harry Wallop (17/3/10)
Unemployment plunge boost economy hopes thisismoney, Ed Monk (17/3/10)
UK unemployment records further fall BBC News (17/3/10) )
Gordon Brown given unexpected boost by fall in unemployment Guardian, Kathryn Hopkins and Julia Kollewe (17/3/10)
Not lagging, but not leading either BBC News blogs: Stephanomics, Stephanie Flanders (17/3/10)
Data
Latest on employment and unemployment Office for National Statistics (17/3/10)
Labour market statistics, March 2010 Office for National Statistics (17/3/10)
Labour Market Statistics page Office for National Statistics
For macroeconomic data for EU countries and other OECD countries, such as the USA, Canada, Japan, Australia and Korea, see:
AMECO online European Commission
Questions
- What factors do you think could affect labour market inactivity rates?
- How might inactivity rates affect an economy’s potential output?
- What factors do you think will have contributed to the growth in part-time employment in the UK?
- The UK economy came out of recession in the last quarter of 2009. Does this mean that unemployment will continue to fall from now on?
With the majority of developed countries now moving out of recession, many people will think the worst is over. But for some countries and some people, there may be worse to come. The single currency in the eurozone was introduced in 1999 and in December 2009, the eurozone saw its highest level of unemployment at 10%. There are now 23 million people unemployed across the 16 countries that make up the eurozone and many of those people reside in Spain, where unemployment has reached a 12-year high of 18.8% and is even expected to reach 20%.
Interest rates in the eurozone and in the UK have been maintained at 1% and 0.5% respectively, and inflation has seen a rise in both places. Whilst in the eurozone inflation remains well below the inflation target, in the UK there has been a rapid rise to 2.9% to December 2009 (see Too much of a push from costs but no pull from demand)
While Spain is suffering from mass unemployment, Greece is struggling with the burden of a huge budget deficit. The former European Central Bank Chief Economist, Otmar Issing, has said that any bailout of Greece would severely damage the Monetary Union and “The Greek disease will spread”. With concern that Greece will not be able to service its debt, there is speculation that the country will be forced out of the currency bloc. However, the chair of the single currency area’s finance ministers said that Greece will not leave the eurozone and does not believe that a state of bankruptcy exists.
So, what’s behind rising unemployment, rising inflation and rising budget deficits and how are they likely to affect the eurozone’s recovery?
Eurozone inflation rises to 0.9% BBC News (15/1/10)
Unemployment sector remains beat in Eurozone pressuring price levels FX Street (29/1/10)
greek bailout would hurt Eurozone – Germany’s Issing Reuters (29/1/10)
Eurozone unemployment rate hits 10% BBC News (29/1/10)
Greece will not go bust or leave Eurozone Reuters, Michele Sinner (27/1/10)
Eurozone unemployment hits 10% AFP (29/1/10)
New rise in German job loss total BBC News (28/1/10)
Spain unemployment nears 12 year high Interactive Investor (29/1/10)
Questions
- How do we define unemployment? What type of unemployment is being experienced in the eurozone?
- Why do you think unemployment levels have risen in the eurozone and in Spain in particular? Illustrate this on a diagram.
- What are the costs of unemployment for (a) the individual (b) governments and (c) society?
- What explanation can be given for rising levels of both unemployment and inflation?
- Inflation in the eurozone increased to 0.9%. What are the factors behind this? Illustrate the effects on a diagram.
- Greece’s forecast budget deficit for 2009 is 12.7% of GDP, but Greece has said it will reduce it to 8.7% of GDP. How does the Greek government intend to do this and what are the likely problems it will face?
- Why could bailing out Greece hurt the eurozone?