According to political business cycle theory, incoming governments tend to take harsh measures at first, when they can blame the cuts on the ‘mess they’ve inherited’ from their predecessors. And then two or three years later, as an election looms, they can start spending more and/or cutting taxes, hoping that the good will this creates will help them win the election.
So are we seeing the start of a new political business cycle with the start of the new Coalition government? The following two articles look at the issue.
Coalition will inflict cuts now and spend later to win a second term Guardian, Larry Elliott (17/5/10)
If you get all the bad news out at once, the only way left to go will be up. Or will it? Independent, Sean O’Grady (18/5/10)
Questions
- Explain what is meant by the ‘political business cycle’.
- Would the existence of a political dimension to the business cycle amplify or dampen the cycle, or could it do either depending on the circumstances? Explain.
- Does the existence of an independent central bank eliminate the political business cycle?
- Will the new Office for Budget Responsibility (see Nipping it in the Budd: Enhancing fiscal credibility?) help to eliminate the political business cycle? Explain your answer.
In the midst of the election campaign we can well imagine that economic data are analysed in minute detail by politicians looking to make political capital. Of particular interest are likely to be the labour market numbers. So here we ‘digest’ a few of the latest numbers from the latest ONS labour market release.
The ONS reports that in the three months to February 2010 the number unemployed in the UK rose above the 2½ million mark to stand at 2.502 million. Of these, 61.2% were male and 38.8% female. The rise of 43,000 on the previous three months (i.e. the three months to November) took unemployment to its highest level since the three months to December 1994.
While unemployment rose, employment fell by 90,000 over the same period to 28.824 million. Of those in employment, 53.2% were male and 46.8% female. Employment levels are now at their lowest since the three months to December 2005. The latest unemployment and employment numbers mean that the number of economically active individuals in the three months to February stood at 31.326 million (53.9% male and 46.1% female), down by 47,000 on the previous three months. Therefore the unemployment rate, which is expressed as a percentage of those economically active, has now edged up to 8% (9.1% amongst males and 6.7% amongst females); it was 6.8% a year ago (7.6% amongst males and 5.9% amongst females) and 5.2% two years ago (5.6% amongst males and 4.8% amongst females).
If we look at the number who have been unemployed for at least one year we see a rather worrying trend with a rise of 89,000 over the past three months to some 726,000. This compares with 486,000 in the same period a year ago and 390,000 two years ago. Another potentially problematic trend is the rise in inactivity rates. The proportion of individuals of working age who are now inactive, so neither employed or actively seeking work, rose to 21.5% in the three months to February (17.5% amongst men and 25.8% amongst females), up from 20.7% in the same period last year (16.2% amongst men and 25.7% amongst females).
Finally, part-time employment fell by 30,000 in the three months to February to 7.671 million. However, it rose by 6000 amongst men to 1.880 million. We now observe that 12.2% of men in employment are employed part-time compared with 43.0% of females in employment. Further, of all part-time workers 24.5% – that’s effectively one-quarter – are male, double the share back in 1984 when these numbers were first recorded.
Articles
UK Unemployment hits 2.5 million mark The Wall Street Journal, Nicholas Winning and Ilona Billington (21/4/10)
UK unemployment at 16-year high Financial Times, Brian Groom (21/4/10)
UK unemployment increases to 2.5 million BBC News (21/4/10) )
Unemployment breaks through 2.5 million Guardian, Graeme Wearden (21/4/10)
UK unemployment surges to 15-year high The Times, Grainne Gilmore (21/4/10)
Data
Latest on employment and unemployment Office for National Statistics (21/4/10)
Labour Market Statistics, April 2010 Office for National Statistics (21/4/10)
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
- The current rate of unemployment is 8%. During the downturn of the early 1990s it peaked at 10.7%. What might explain this difference? Do you think the current rate may have now peaked?
- What might explain the rise in inactivity rates? Does this rise have any implications for potential output?
- Does the rise in the number of those unemployed for over a year have implications for our potential output?
- Go back through the commentary: are there any notable gender differences in the figures? What factors might help to explain these?
- In 1984 part-time employment stood at 4.985 million while currently the figure is 7.671 million. Is it possible to explain this growth in part-time employment in the UK?
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?