Sunday, September 18, 2022
Rare good news as the misery index dips - but there's a long way to go
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on www.thetimes.co.uk This is an excerpt. Not to be reproduced without permission

There has been some rare good news on the economy in recent days. Inflation fell for the first time since September last year, dipping from 10.1 to 9.9 per cent last month and ending a series of upside surprises. The unemployment rate also fell, from 3.8 to 3.6 per cent, pretty much as close to full employment as you can get, and the lowest since mid-1974. I shall dig a little deeper into the unemployment fall a little later, including a technical explanation of why it might have happened.

The misery index, invented by the late Arthur Okun, an eminent American economist, has thus fallen for the first time in a long while. It is the combination of the unemployment and inflation rates, and so is fractionally lower than a month ago but much higher than this time last year and, indeed for many months before that.

Okun also invented the “two successive quarters” definition of recession; gross domestic product (GDP) having to fall for two quarters in a row. As chairman of Lyndon Johnson’s Council of Economic Advisers, he was looking for a way to get LBJ off the hook after some bad economic news. It was a political contrivance and ultimately unnecessary, because LBJ pulled out of the 1968 presidential race. But it has stuck, though not in America, where declaring whether there is a recession or not is the responsibility of the National Bureau of Economic Research’s business cycle dating committee, which is not nearly as much fun as it sounds.

Anyway, the two-quarter definition may soon be tested in this country, depending on how much tomorrow’s bank holiday for the Queen’s state funeral reduces GDP. If that was all that is happening it would be an artificial recession, GDP having fallen fractionally in the second quarter, in which there was also an additional bank holiday. But the economy has clearly lost momentum and is flat at best, even without those special factors.

More on that in a moment, when I return to unemployment. Firstly, what about inflation? The dip in consumer price inflation was not the only bit of inflation good news. What is sometimes called “pipeline” inflation, for producer prices, also edged lower, though remains strikingly higher. Input price inflation, for raw materials and fuels, came down from 22.6 to 20.5 per cent, while output inflation – for prices charged – slipped from 17.1 to 16.1 per cent.

There may be further good news on inflation in the short term. The drop in petrol and diesel prices, the big reason for inflation’s fall last month, has gone further. In August, the average petrol price used by the Office for National Statistics was 175p a litre. The latest, according to the RAC, is 167p.

After that, we will discover that inflation has not yet peaked. The £2,500 energy price freeze level for the average household includes the £400 payment to households the new prime minister has inherited from her leadership rival Rishi Sunak. But that £400 will not be included in the consumer prices index, so energy prices will still be exerting an upward impact on inflation from October 1.
Businesses meanwhile are having to wait for their help.

Inflation will thus rise further over the autumn and winter. Optimists think it will not go much above 10 per cent, pessimists see the peak at closer to 12 per cent.

It is, however, possible to see the light at the end of the inflation tunnel. The “electricity, gas and other fuels” component of the consumer prices index is currently up 69.7 per cent on a year ago. By the autumn of next year, it will be close to zero, and overall inflation will be down to half, at most, its current rate of roughly 10 per cent. The public, I should say, is with ne on this. The latest Bank of England survey of inflation expectations for two and five years ahead shows that they have eased back from 3.4 to 3.2 per cent in two years’ time, and from 3.5 to 3.1 per cent in five years.

There is still pain to go through, with food prices rising at an annual rate of 13.4 per cent, and for the Bank – which is ready to raise interest rates aggressively again this week – “core” inflation is much too high at 6.3 per cent.
The UK and European governments are capping energy prices, and this will hold down measured inflation. Other inflationary pressures, it is assumed, will subside as aa result of economic slowdowns/recessions, partly brought about by higher interest rates, partly the squeeze on real incomes already in place.

That brings me to the second element of the misery index, the lowest unemployment rate since 1974. How can unemployment be falling when the economy has stopped growing? One reason for that is unemployment is a lagging indicator. It responds with a delay to economic growth, so the slowdown may not have taken effect yet.

The technical reason I mentioned was brought to my attention during a webinar a few days ago by Sir Charlie Bean, former deputy governor of the Bank. Many people, I suspect, think the unemployment figures are calculated by using an actual count of people out of work. That used to be the case, when the main measure was the claimant count, which counted the numbers claiming unemployment benefit under its various names.

Now the unemployment and employment totals are taken from the Labour Force Survey (LFS), the largest undertaken by the Office for National Statistics, this year covering nearly 76,000 individuals in almost 35,000 households. For anybody worried that this does not give an accurate picture, a good sample size for, say, an opinion poll would be 2,000.

Those selected for the survey are interviewed five times at three-monthly intervals. Their first interview is Wave 1, through to Wave 5, after which they drop out of the survey to be replaced by others. Now, and this is the point that Bean was making, it so happens that the latest people recruited to the survey, who did their Wave 1 interviews in July, had a very low unemployment rate, just 2.3 per cent, thus dragging down the average, an effect that may continue for some time to come, suggesting that the unemployment rate may have further to fall.

But, and this is important, those latest recruits also had a higher inactivity rate – not in work and not being available for work – 23.4 per cent. It is important because, at present, the low unemployment rate is not a great measure of the health of the labour market. The inactivity rate for people aged 16-64 has gone up from 20.4 per cent before the pandemic to 21.7 per cent now and, judging by the latest LFS cohort, may have further to rise.

Just over 640,000 more people are economically inactive, many due to long-term health issues, though most of these are not long Covid. The rise in inactivity explains why, despite a low unemployment rate, employment is about 330,000 below pre-pandemic levels. It also helps explain labour shortages, along with other factors, including Brexit. The labour market is a long way from being restored to health.

Incidentally, back in 1974, when the unemployment rate was last this low, the labour market was very different. Then, the employment rate among 16-64 men was 91 per cent, compared with 78.8 per cent now; part of that fall being due to more years in education now. It is among women, though, that the change has been striking, with their employment rate up from 55 to 72.1 per cent.

To return to the misery index, it is the unemployment rate that matters. There is still, despite the energy price freeze, a miserable autumn and winter to come, driven by inflation if not unemployment. But we can hope that we will not be so miserable for too long.