How much must unemployment go up to keep a lid on inflation?
Those of you who follow these things will know that events have taken a bit of a turn in Newport. Not since Llanelli beat the All Blacks at rugby 50 years ago, a few dozen miles away, has there been so much excitement in South Wales.
The kerfuffle in Newport, home of the Office for National Statistics (ONS), has been about its closely watched Labour Force Survey (LFS) — and low response rates calling into question the accuracy of this key set of indicators for policymakers, including at the Bank of England. It has also created a dilemma for anyone trying to analyse this essential part of the economy, including me.
As things stand, the last full set of LFS data came out more than six weeks ago and covered the period to July. In terms of economic data, that is, if not ancient history, at least very backward looking.
In place of the usual LFS figures, the ONS put together an alternative set, some of it based on experimental data, which is why some economists have been inclined to treat the latest statistics with a large pinch of salt.
Peering through the fog, the new figures appear to confirm a picture of gently rising unemployment and gradually weaker employment, which has yet to get back to pre-Covid levels. Economic inactivity — the proportion of working-age people who are not part of the labour force — is running at just under 21 per cent, or 8.7 million people, higher than before Covid but lower than its post-pandemic peaks.
The first question is whether there is anything in these figures to prompt the Bank’s monetary policy committee (MPC) to raise interest rates from the current 5.25 per cent level this week.
The answer to that, taken in the round, is no. Wage growth is still too strong for the Bank’s comfort, but the labour market is loosening, and other activity indicators are weakening. The latest “flash” purchasing managers’ index, for this month, dropped to a nine-month low and suggested that the economy is at best limping along. The CBI’s industrial trends survey recorded another fall in manufacturing volumes, and a drop in employment in the sector.
The picture of a softer labour market is confirmed by surveys from the Recruitment and Employment Confederation (REC) and others. It is noticeable that a few months ago, many headlines were about worker shortages, which of course persist in some sectors. Now they are outnumbered by stories of job cuts and closures.
You can never say never with the MPC. Last month it surprised the markets with a narrow vote, 5-4, to keep rates on hold. This week it would be a big surprise if the committee were to vote to raise rates. Two surprises in a row would not be unprecedented but would be strange. The Bank should keep official interest rates on hold.
The second question is by how much unemployment needs to rise to deliver the lower pay increases consistent with the 2 per cent inflation target. There is quite a long history to this question. The Phillips curve, developed by the New Zealand economist Bill Phillips at the London School of Economics after the Second World War, explained the inverse relationship between the unemployment rate and pay growth: the higher the first, the lower the second, other things being equal.
The Phillips curve has undergone various modifications since, but remains a widely used concept, as does the “natural” rate of unemployment — or, to use its more common but clumsy name, the non-accelerating inflation rate of unemployment (Nairu). All that word salad means is the rate of unemployment consistent with stable inflation.
There is also a bit of history on this topic at the Bank. When, ten years ago, Mark Carney took over as Bank governor, he was determined to do things differently. He launched “forward guidance” on interest rates, in contrast to the previous approach under which the MPC looked afresh at rates at each meeting. His version of forward guidance was that the Bank would not consider raising rates until the unemployment rate dropped to 7 per cent, which was not predicted to happen until 2016.
As it turned out, unemployment dropped quite quickly to 7 per cent, but the Bank decided it was too soon to raise rates — and Carney was on the way to his “unreliable boyfriend” reputation.
The point here is not to revive all that but to remind you that a 7 per cent unemployment rate, equivalent at the time to roughly 2.2 million people out of work, was thought to be close to the Nairu. Drop below it and higher inflation would be the result,
It was too gloomy a view. Although many say the Bank should indeed have begun raising rates at about that time, unemployment was to fall to less than 4 per cent before the pandemic without triggering a rise in inflation, which averaged less than 2 per cent in 2019.
What about now? Unlike in 2013, we start from a position in which pay is rising by 7 or 8 per cent, double or more the rate consistent with meeting and sticking to the 2 per cent inflation target.
In its August monetary policy report, the Bank predicted that by the third quarter of 2025, inflation would be back at 2 per cent, alongside earnings growth of 2.5 per cent and unemployment of 4.8 per cent — above the latest estimated rate of 4.2 per cent, but not by much.
The Office for Budget Responsibility (OBR) was even more sanguine, predicting an unemployment peak of 4.4 per cent, roughly 1.5 million, and for that to be consistent with average earnings growth of less than 2 per cent a year from next year onwards.
I would not expect that forecast to survive the revisions the OBR will make in the next three weeks. Both it and the Bank appear too optimistic. They suggest the economy will have a very soft landing and a near-painless adjustment to low inflation. Things that look too good to be true, usually are.
A feature of the pandemic was that while economic inactivity rose, the increase in unemployment was modest, perhaps because of the furlough scheme.
The previous two recessions, 1990-92 and 2008-9, resulted in increases in unemployment of between 55 and 65 per cent. That would imply a rise in the unemployment rate from last year’s low of 3.5 per cent to 5.5-6 per cent. Whether even that will be enough to keep a lid on inflation is the big question.
How much must unemployment go up to keep a lid on inflation?
Those of you who follow these things will know that events have taken a bit of a turn in Newport. Not since Llanelli beat the All Blacks at rugby 50 years ago, a few dozen miles away, has there been so much excitement in South Wales.
The kerfuffle in Newport, home of the Office for National Statistics (ONS), has been about its closely watched Labour Force Survey (LFS) — and low response rates calling into question the accuracy of this key set of indicators for policymakers, including at the Bank of England. It has also created a dilemma for anyone trying to analyse this essential part of the economy, including me.
As things stand, the last full set of LFS data came out more than six weeks ago and covered the period to July. In terms of economic data, that is, if not ancient history, at least very backward looking.
In place of the usual LFS figures, the ONS put together an alternative set, some of it based on experimental data, which is why some economists have been inclined to treat the latest statistics with a large pinch of salt.
Peering through the fog, the new figures appear to confirm a picture of gently rising unemployment and gradually weaker employment, which has yet to get back to pre-Covid levels. Economic inactivity — the proportion of working-age people who are not part of the labour force — is running at just under 21 per cent, or 8.7 million people, higher than before Covid but lower than its post-pandemic peaks.
The first question is whether there is anything in these figures to prompt the Bank’s monetary policy committee (MPC) to raise interest rates from the current 5.25 per cent level this week.
The answer to that, taken in the round, is no. Wage growth is still too strong for the Bank’s comfort, but the labour market is loosening, and other activity indicators are weakening. The latest “flash” purchasing managers’ index, for this month, dropped to a nine-month low and suggested that the economy is at best limping along. The CBI’s industrial trends survey recorded another fall in manufacturing volumes, and a drop in employment in the sector.
The picture of a softer labour market is confirmed by surveys from the Recruitment and Employment Confederation (REC) and others. It is noticeable that a few months ago, many headlines were about worker shortages, which of course persist in some sectors. Now they are outnumbered by stories of job cuts and closures.
You can never say never with the MPC. Last month it surprised the markets with a narrow vote, 5-4, to keep rates on hold. This week it would be a big surprise if the committee were to vote to raise rates. Two surprises in a row would not be unprecedented but would be strange. The Bank should keep official interest rates on hold.
The second question is by how much unemployment needs to rise to deliver the lower pay increases consistent with the 2 per cent inflation target. There is quite a long history to this question. The Phillips curve, developed by the New Zealand economist Bill Phillips at the London School of Economics after the Second World War, explained the inverse relationship between the unemployment rate and pay growth: the higher the first, the lower the second, other things being equal.
The Phillips curve has undergone various modifications since, but remains a widely used concept, as does the “natural” rate of unemployment — or, to use its more common but clumsy name, the non-accelerating inflation rate of unemployment (Nairu). All that word salad means is the rate of unemployment consistent with stable inflation.
There is also a bit of history on this topic at the Bank. When, ten years ago, Mark Carney took over as Bank governor, he was determined to do things differently. He launched “forward guidance” on interest rates, in contrast to the previous approach under which the MPC looked afresh at rates at each meeting. His version of forward guidance was that the Bank would not consider raising rates until the unemployment rate dropped to 7 per cent, which was not predicted to happen until 2016.
As it turned out, unemployment dropped quite quickly to 7 per cent, but the Bank decided it was too soon to raise rates — and Carney was on the way to his “unreliable boyfriend” reputation.
The point here is not to revive all that but to remind you that a 7 per cent unemployment rate, equivalent at the time to roughly 2.2 million people out of work, was thought to be close to the Nairu. Drop below it and higher inflation would be the result,
It was too gloomy a view. Although many say the Bank should indeed have begun raising rates at about that time, unemployment was to fall to less than 4 per cent before the pandemic without triggering a rise in inflation, which averaged less than 2 per cent in 2019.
What about now? Unlike in 2013, we start from a position in which pay is rising by 7 or 8 per cent, double or more the rate consistent with meeting and sticking to the 2 per cent inflation target.
In its August monetary policy report, the Bank predicted that by the third quarter of 2025, inflation would be back at 2 per cent, alongside earnings growth of 2.5 per cent and unemployment of 4.8 per cent — above the latest estimated rate of 4.2 per cent, but not by much.
The Office for Budget Responsibility (OBR) was even more sanguine, predicting an unemployment peak of 4.4 per cent, roughly 1.5 million, and for that to be consistent with average earnings growth of less than 2 per cent a year from next year onwards.
I would not expect that forecast to survive the revisions the OBR will make in the next three weeks. Both it and the Bank appear too optimistic. They suggest the economy will have a very soft landing and a near-painless adjustment to low inflation. Things that look too good to be true, usually are.
A feature of the pandemic was that while economic inactivity rose, the increase in unemployment was modest, perhaps because of the furlough scheme.
The previous two recessions, 1990-92 and 2008-9, resulted in increases in unemployment of between 55 and 65 per cent. That would imply a rise in the unemployment rate from last year’s low of 3.5 per cent to 5.5-6 per cent. Whether even that will be enough to keep a lid on inflation is the big question.
How much must unemployment go up to keep a lid on inflation?
Those of you who follow these things will know that events have taken a bit of a turn in Newport. Not since Llanelli beat the All Blacks at rugby 50 years ago, a few dozen miles away, has there been so much excitement in South Wales.
The kerfuffle in Newport, home of the Office for National Statistics (ONS), has been about its closely watched Labour Force Survey (LFS) — and low response rates calling into question the accuracy of this key set of indicators for policymakers, including at the Bank of England. It has also created a dilemma for anyone trying to analyse this essential part of the economy, including me.
As things stand, the last full set of LFS data came out more than six weeks ago and covered the period to July. In terms of economic data, that is, if not ancient history, at least very backward looking.
In place of the usual LFS figures, the ONS put together an alternative set, some of it based on experimental data, which is why some economists have been inclined to treat the latest statistics with a large pinch of salt.
Peering through the fog, the new figures appear to confirm a picture of gently rising unemployment and gradually weaker employment, which has yet to get back to pre-Covid levels. Economic inactivity — the proportion of working-age people who are not part of the labour force — is running at just under 21 per cent, or 8.7 million people, higher than before Covid but lower than its post-pandemic peaks.
The first question is whether there is anything in these figures to prompt the Bank’s monetary policy committee (MPC) to raise interest rates from the current 5.25 per cent level this week.
The answer to that, taken in the round, is no. Wage growth is still too strong for the Bank’s comfort, but the labour market is loosening, and other activity indicators are weakening. The latest “flash” purchasing managers’ index, for this month, dropped to a nine-month low and suggested that the economy is at best limping along. The CBI’s industrial trends survey recorded another fall in manufacturing volumes, and a drop in employment in the sector.
The picture of a softer labour market is confirmed by surveys from the Recruitment and Employment Confederation (REC) and others. It is noticeable that a few months ago, many headlines were about worker shortages, which of course persist in some sectors. Now they are outnumbered by stories of job cuts and closures.
You can never say never with the MPC. Last month it surprised the markets with a narrow vote, 5-4, to keep rates on hold. This week it would be a big surprise if the committee were to vote to raise rates. Two surprises in a row would not be unprecedented but would be strange. The Bank should keep official interest rates on hold.
The second question is by how much unemployment needs to rise to deliver the lower pay increases consistent with the 2 per cent inflation target. There is quite a long history to this question. The Phillips curve, developed by the New Zealand economist Bill Phillips at the London School of Economics after the Second World War, explained the inverse relationship between the unemployment rate and pay growth: the higher the first, the lower the second, other things being equal.
The Phillips curve has undergone various modifications since, but remains a widely used concept, as does the “natural” rate of unemployment — or, to use its more common but clumsy name, the non-accelerating inflation rate of unemployment (Nairu). All that word salad means is the rate of unemployment consistent with stable inflation.
There is also a bit of history on this topic at the Bank. When, ten years ago, Mark Carney took over as Bank governor, he was determined to do things differently. He launched “forward guidance” on interest rates, in contrast to the previous approach under which the MPC looked afresh at rates at each meeting. His version of forward guidance was that the Bank would not consider raising rates until the unemployment rate dropped to 7 per cent, which was not predicted to happen until 2016.
As it turned out, unemployment dropped quite quickly to 7 per cent, but the Bank decided it was too soon to raise rates — and Carney was on the way to his “unreliable boyfriend” reputation.
The point here is not to revive all that but to remind you that a 7 per cent unemployment rate, equivalent at the time to roughly 2.2 million people out of work, was thought to be close to the Nairu. Drop below it and higher inflation would be the result,
It was too gloomy a view. Although many say the Bank should indeed have begun raising rates at about that time, unemployment was to fall to less than 4 per cent before the pandemic without triggering a rise in inflation, which averaged less than 2 per cent in 2019.
What about now? Unlike in 2013, we start from a position in which pay is rising by 7 or 8 per cent, double or more the rate consistent with meeting and sticking to the 2 per cent inflation target.
In its August monetary policy report, the Bank predicted that by the third quarter of 2025, inflation would be back at 2 per cent, alongside earnings growth of 2.5 per cent and unemployment of 4.8 per cent — above the latest estimated rate of 4.2 per cent, but not by much.
The Office for Budget Responsibility (OBR) was even more sanguine, predicting an unemployment peak of 4.4 per cent, roughly 1.5 million, and for that to be consistent with average earnings growth of less than 2 per cent a year from next year onwards.
I would not expect that forecast to survive the revisions the OBR will make in the next three weeks. Both it and the Bank appear too optimistic. They suggest the economy will have a very soft landing and a near-painless adjustment to low inflation. Things that look too good to be true, usually are.
A feature of the pandemic was that while economic inactivity rose, the increase in unemployment was modest, perhaps because of the furlough scheme.
The previous two recessions, 1990-92 and 2008-9, resulted in increases in unemployment of between 55 and 65 per cent. That would imply a rise in the unemployment rate from last year’s low of 3.5 per cent to 5.5-6 per cent. Whether even that will be enough to keep a lid on inflation is the big question.
How much must unemployment go up to keep a lid on inflation?
Those of you who follow these things will know that events have taken a bit of a turn in Newport. Not since Llanelli beat the All Blacks at rugby 50 years ago, a few dozen miles away, has there been so much excitement in South Wales.
The kerfuffle in Newport, home of the Office for National Statistics (ONS), has been about its closely watched Labour Force Survey (LFS) — and low response rates calling into question the accuracy of this key set of indicators for policymakers, including at the Bank of England. It has also created a dilemma for anyone trying to analyse this essential part of the economy, including me.
As things stand, the last full set of LFS data came out more than six weeks ago and covered the period to July. In terms of economic data, that is, if not ancient history, at least very backward looking.
In place of the usual LFS figures, the ONS put together an alternative set, some of it based on experimental data, which is why some economists have been inclined to treat the latest statistics with a large pinch of salt.
Peering through the fog, the new figures appear to confirm a picture of gently rising unemployment and gradually weaker employment, which has yet to get back to pre-Covid levels. Economic inactivity — the proportion of working-age people who are not part of the labour force — is running at just under 21 per cent, or 8.7 million people, higher than before Covid but lower than its post-pandemic peaks.
The first question is whether there is anything in these figures to prompt the Bank’s monetary policy committee (MPC) to raise interest rates from the current 5.25 per cent level this week.
The answer to that, taken in the round, is no. Wage growth is still too strong for the Bank’s comfort, but the labour market is loosening, and other activity indicators are weakening. The latest “flash” purchasing managers’ index, for this month, dropped to a nine-month low and suggested that the economy is at best limping along. The CBI’s industrial trends survey recorded another fall in manufacturing volumes, and a drop in employment in the sector.
The picture of a softer labour market is confirmed by surveys from the Recruitment and Employment Confederation (REC) and others. It is noticeable that a few months ago, many headlines were about worker shortages, which of course persist in some sectors. Now they are outnumbered by stories of job cuts and closures.
You can never say never with the MPC. Last month it surprised the markets with a narrow vote, 5-4, to keep rates on hold. This week it would be a big surprise if the committee were to vote to raise rates. Two surprises in a row would not be unprecedented but would be strange. The Bank should keep official interest rates on hold.
The second question is by how much unemployment needs to rise to deliver the lower pay increases consistent with the 2 per cent inflation target. There is quite a long history to this question. The Phillips curve, developed by the New Zealand economist Bill Phillips at the London School of Economics after the Second World War, explained the inverse relationship between the unemployment rate and pay growth: the higher the first, the lower the second, other things being equal.
The Phillips curve has undergone various modifications since, but remains a widely used concept, as does the “natural” rate of unemployment — or, to use its more common but clumsy name, the non-accelerating inflation rate of unemployment (Nairu). All that word salad means is the rate of unemployment consistent with stable inflation.
There is also a bit of history on this topic at the Bank. When, ten years ago, Mark Carney took over as Bank governor, he was determined to do things differently. He launched “forward guidance” on interest rates, in contrast to the previous approach under which the MPC looked afresh at rates at each meeting. His version of forward guidance was that the Bank would not consider raising rates until the unemployment rate dropped to 7 per cent, which was not predicted to happen until 2016.
As it turned out, unemployment dropped quite quickly to 7 per cent, but the Bank decided it was too soon to raise rates — and Carney was on the way to his “unreliable boyfriend” reputation.
The point here is not to revive all that but to remind you that a 7 per cent unemployment rate, equivalent at the time to roughly 2.2 million people out of work, was thought to be close to the Nairu. Drop below it and higher inflation would be the result,
It was too gloomy a view. Although many say the Bank should indeed have begun raising rates at about that time, unemployment was to fall to less than 4 per cent before the pandemic without triggering a rise in inflation, which averaged less than 2 per cent in 2019.
What about now? Unlike in 2013, we start from a position in which pay is rising by 7 or 8 per cent, double or more the rate consistent with meeting and sticking to the 2 per cent inflation target.
In its August monetary policy report, the Bank predicted that by the third quarter of 2025, inflation would be back at 2 per cent, alongside earnings growth of 2.5 per cent and unemployment of 4.8 per cent — above the latest estimated rate of 4.2 per cent, but not by much.
The Office for Budget Responsibility (OBR) was even more sanguine, predicting an unemployment peak of 4.4 per cent, roughly 1.5 million, and for that to be consistent with average earnings growth of less than 2 per cent a year from next year onwards.
I would not expect that forecast to survive the revisions the OBR will make in the next three weeks. Both it and the Bank appear too optimistic. They suggest the economy will have a very soft landing and a near-painless adjustment to low inflation. Things that look too good to be true, usually are.
A feature of the pandemic was that while economic inactivity rose, the increase in unemployment was modest, perhaps because of the furlough scheme.
The previous two recessions, 1990-92 and 2008-9, resulted in increases in unemployment of between 55 and 65 per cent. That would imply a rise in the unemployment rate from last year’s low of 3.5 per cent to 5.5-6 per cent. Whether even that will be enough to keep a lid on inflation is the big question.
How much must unemployment go up to keep a lid on inflation?
Those of you who follow these things will know that events have taken a bit of a turn in Newport. Not since Llanelli beat the All Blacks at rugby 50 years ago, a few dozen miles away, has there been so much excitement in South Wales.
The kerfuffle in Newport, home of the Office for National Statistics (ONS), has been about its closely watched Labour Force Survey (LFS) — and low response rates calling into question the accuracy of this key set of indicators for policymakers, including at the Bank of England. It has also created a dilemma for anyone trying to analyse this essential part of the economy, including me.
As things stand, the last full set of LFS data came out more than six weeks ago and covered the period to July. In terms of economic data, that is, if not ancient history, at least very backward looking.
In place of the usual LFS figures, the ONS put together an alternative set, some of it based on experimental data, which is why some economists have been inclined to treat the latest statistics with a large pinch of salt.
Peering through the fog, the new figures appear to confirm a picture of gently rising unemployment and gradually weaker employment, which has yet to get back to pre-Covid levels. Economic inactivity — the proportion of working-age people who are not part of the labour force — is running at just under 21 per cent, or 8.7 million people, higher than before Covid but lower than its post-pandemic peaks.
The first question is whether there is anything in these figures to prompt the Bank’s monetary policy committee (MPC) to raise interest rates from the current 5.25 per cent level this week.
The answer to that, taken in the round, is no. Wage growth is still too strong for the Bank’s comfort, but the labour market is loosening, and other activity indicators are weakening. The latest “flash” purchasing managers’ index, for this month, dropped to a nine-month low and suggested that the economy is at best limping along. The CBI’s industrial trends survey recorded another fall in manufacturing volumes, and a drop in employment in the sector.
The picture of a softer labour market is confirmed by surveys from the Recruitment and Employment Confederation (REC) and others. It is noticeable that a few months ago, many headlines were about worker shortages, which of course persist in some sectors. Now they are outnumbered by stories of job cuts and closures.
You can never say never with the MPC. Last month it surprised the markets with a narrow vote, 5-4, to keep rates on hold. This week it would be a big surprise if the committee were to vote to raise rates. Two surprises in a row would not be unprecedented but would be strange. The Bank should keep official interest rates on hold.
The second question is by how much unemployment needs to rise to deliver the lower pay increases consistent with the 2 per cent inflation target. There is quite a long history to this question. The Phillips curve, developed by the New Zealand economist Bill Phillips at the London School of Economics after the Second World War, explained the inverse relationship between the unemployment rate and pay growth: the higher the first, the lower the second, other things being equal.
The Phillips curve has undergone various modifications since, but remains a widely used concept, as does the “natural” rate of unemployment — or, to use its more common but clumsy name, the non-accelerating inflation rate of unemployment (Nairu). All that word salad means is the rate of unemployment consistent with stable inflation.
There is also a bit of history on this topic at the Bank. When, ten years ago, Mark Carney took over as Bank governor, he was determined to do things differently. He launched “forward guidance” on interest rates, in contrast to the previous approach under which the MPC looked afresh at rates at each meeting. His version of forward guidance was that the Bank would not consider raising rates until the unemployment rate dropped to 7 per cent, which was not predicted to happen until 2016.
As it turned out, unemployment dropped quite quickly to 7 per cent, but the Bank decided it was too soon to raise rates — and Carney was on the way to his “unreliable boyfriend” reputation.
The point here is not to revive all that but to remind you that a 7 per cent unemployment rate, equivalent at the time to roughly 2.2 million people out of work, was thought to be close to the Nairu. Drop below it and higher inflation would be the result,
It was too gloomy a view. Although many say the Bank should indeed have begun raising rates at about that time, unemployment was to fall to less than 4 per cent before the pandemic without triggering a rise in inflation, which averaged less than 2 per cent in 2019.
What about now? Unlike in 2013, we start from a position in which pay is rising by 7 or 8 per cent, double or more the rate consistent with meeting and sticking to the 2 per cent inflation target.
In its August monetary policy report, the Bank predicted that by the third quarter of 2025, inflation would be back at 2 per cent, alongside earnings growth of 2.5 per cent and unemployment of 4.8 per cent — above the latest estimated rate of 4.2 per cent, but not by much.
The Office for Budget Responsibility (OBR) was even more sanguine, predicting an unemployment peak of 4.4 per cent, roughly 1.5 million, and for that to be consistent with average earnings growth of less than 2 per cent a year from next year onwards.
I would not expect that forecast to survive the revisions the OBR will make in the next three weeks. Both it and the Bank appear too optimistic. They suggest the economy will have a very soft landing and a near-painless adjustment to low inflation. Things that look too good to be true, usually are.
A feature of the pandemic was that while economic inactivity rose, the increase in unemployment was modest, perhaps because of the furlough scheme.
The previous two recessions, 1990-92 and 2008-9, resulted in increases in unemployment of between 55 and 65 per cent. That would imply a rise in the unemployment rate from last year’s low of 3.5 per cent to 5.5-6 per cent. Whether even that will be enough to keep a lid on inflation is the big question.
How much must unemployment go up to keep a lid on inflation?
Those of you who follow these things will know that events have taken a bit of a turn in Newport. Not since Llanelli beat the All Blacks at rugby 50 years ago, a few dozen miles away, has there been so much excitement in South Wales.
The kerfuffle in Newport, home of the Office for National Statistics (ONS), has been about its closely watched Labour Force Survey (LFS) — and low response rates calling into question the accuracy of this key set of indicators for policymakers, including at the Bank of England. It has also created a dilemma for anyone trying to analyse this essential part of the economy, including me.
As things stand, the last full set of LFS data came out more than six weeks ago and covered the period to July. In terms of economic data, that is, if not ancient history, at least very backward looking.
In place of the usual LFS figures, the ONS put together an alternative set, some of it based on experimental data, which is why some economists have been inclined to treat the latest statistics with a large pinch of salt.
Peering through the fog, the new figures appear to confirm a picture of gently rising unemployment and gradually weaker employment, which has yet to get back to pre-Covid levels. Economic inactivity — the proportion of working-age people who are not part of the labour force — is running at just under 21 per cent, or 8.7 million people, higher than before Covid but lower than its post-pandemic peaks.
The first question is whether there is anything in these figures to prompt the Bank’s monetary policy committee (MPC) to raise interest rates from the current 5.25 per cent level this week.
The answer to that, taken in the round, is no. Wage growth is still too strong for the Bank’s comfort, but the labour market is loosening, and other activity indicators are weakening. The latest “flash” purchasing managers’ index, for this month, dropped to a nine-month low and suggested that the economy is at best limping along. The CBI’s industrial trends survey recorded another fall in manufacturing volumes, and a drop in employment in the sector.
The picture of a softer labour market is confirmed by surveys from the Recruitment and Employment Confederation (REC) and others. It is noticeable that a few months ago, many headlines were about worker shortages, which of course persist in some sectors. Now they are outnumbered by stories of job cuts and closures.
You can never say never with the MPC. Last month it surprised the markets with a narrow vote, 5-4, to keep rates on hold. This week it would be a big surprise if the committee were to vote to raise rates. Two surprises in a row would not be unprecedented but would be strange. The Bank should keep official interest rates on hold.
The second question is by how much unemployment needs to rise to deliver the lower pay increases consistent with the 2 per cent inflation target. There is quite a long history to this question. The Phillips curve, developed by the New Zealand economist Bill Phillips at the London School of Economics after the Second World War, explained the inverse relationship between the unemployment rate and pay growth: the higher the first, the lower the second, other things being equal.
The Phillips curve has undergone various modifications since, but remains a widely used concept, as does the “natural” rate of unemployment — or, to use its more common but clumsy name, the non-accelerating inflation rate of unemployment (Nairu). All that word salad means is the rate of unemployment consistent with stable inflation.
There is also a bit of history on this topic at the Bank. When, ten years ago, Mark Carney took over as Bank governor, he was determined to do things differently. He launched “forward guidance” on interest rates, in contrast to the previous approach under which the MPC looked afresh at rates at each meeting. His version of forward guidance was that the Bank would not consider raising rates until the unemployment rate dropped to 7 per cent, which was not predicted to happen until 2016.
As it turned out, unemployment dropped quite quickly to 7 per cent, but the Bank decided it was too soon to raise rates — and Carney was on the way to his “unreliable boyfriend” reputation.
The point here is not to revive all that but to remind you that a 7 per cent unemployment rate, equivalent at the time to roughly 2.2 million people out of work, was thought to be close to the Nairu. Drop below it and higher inflation would be the result,
It was too gloomy a view. Although many say the Bank should indeed have begun raising rates at about that time, unemployment was to fall to less than 4 per cent before the pandemic without triggering a rise in inflation, which averaged less than 2 per cent in 2019.
What about now? Unlike in 2013, we start from a position in which pay is rising by 7 or 8 per cent, double or more the rate consistent with meeting and sticking to the 2 per cent inflation target.
In its August monetary policy report, the Bank predicted that by the third quarter of 2025, inflation would be back at 2 per cent, alongside earnings growth of 2.5 per cent and unemployment of 4.8 per cent — above the latest estimated rate of 4.2 per cent, but not by much.
The Office for Budget Responsibility (OBR) was even more sanguine, predicting an unemployment peak of 4.4 per cent, roughly 1.5 million, and for that to be consistent with average earnings growth of less than 2 per cent a year from next year onwards.
I would not expect that forecast to survive the revisions the OBR will make in the next three weeks. Both it and the Bank appear too optimistic. They suggest the economy will have a very soft landing and a near-painless adjustment to low inflation. Things that look too good to be true, usually are.
A feature of the pandemic was that while economic inactivity rose, the increase in unemployment was modest, perhaps because of the furlough scheme.
The previous two recessions, 1990-92 and 2008-9, resulted in increases in unemployment of between 55 and 65 per cent. That would imply a rise in the unemployment rate from last year’s low of 3.5 per cent to 5.5-6 per cent. Whether even that will be enough to keep a lid on inflation is the big question.
--
This message has been checked by Libraesva ESG and is found to be clean.
Click here to mark it as spam.
Click here to blocklist sender
How much must unemployment go up to keep a lid on inflation?
Those of you who follow these things will know that events have taken a bit of a turn in Newport. Not since Llanelli beat the All Blacks at rugby 50 years ago, a few dozen miles away, has there been so much excitement in South Wales.
The kerfuffle in Newport, home of the Office for National Statistics (ONS), has been about its closely watched Labour Force Survey (LFS) — and low response rates calling into question the accuracy of this key set of indicators for policymakers, including at the Bank of England. It has also created a dilemma for anyone trying to analyse this essential part of the economy, including me.
As things stand, the last full set of LFS data came out more than six weeks ago and covered the period to July. In terms of economic data, that is, if not ancient history, at least very backward looking.
In place of the usual LFS figures, the ONS put together an alternative set, some of it based on experimental data, which is why some economists have been inclined to treat the latest statistics with a large pinch of salt.
Peering through the fog, the new figures appear to confirm a picture of gently rising unemployment and gradually weaker employment, which has yet to get back to pre-Covid levels. Economic inactivity — the proportion of working-age people who are not part of the labour force — is running at just under 21 per cent, or 8.7 million people, higher than before Covid but lower than its post-pandemic peaks.
The first question is whether there is anything in these figures to prompt the Bank’s monetary policy committee (MPC) to raise interest rates from the current 5.25 per cent level this week.
The answer to that, taken in the round, is no. Wage growth is still too strong for the Bank’s comfort, but the labour market is loosening, and other activity indicators are weakening. The latest “flash” purchasing managers’ index, for this month, dropped to a nine-month low and suggested that the economy is at best limping along. The CBI’s industrial trends survey recorded another fall in manufacturing volumes, and a drop in employment in the sector.
The picture of a softer labour market is confirmed by surveys from the Recruitment and Employment Confederation (REC) and others. It is noticeable that a few months ago, many headlines were about worker shortages, which of course persist in some sectors. Now they are outnumbered by stories of job cuts and closures.
You can never say never with the MPC. Last month it surprised the markets with a narrow vote, 5-4, to keep rates on hold. This week it would be a big surprise if the committee were to vote to raise rates. Two surprises in a row would not be unprecedented but would be strange. The Bank should keep official interest rates on hold.
The second question is by how much unemployment needs to rise to deliver the lower pay increases consistent with the 2 per cent inflation target. There is quite a long history to this question. The Phillips curve, developed by the New Zealand economist Bill Phillips at the London School of Economics after the Second World War, explained the inverse relationship between the unemployment rate and pay growth: the higher the first, the lower the second, other things being equal.
The Phillips curve has undergone various modifications since, but remains a widely used concept, as does the “natural” rate of unemployment — or, to use its more common but clumsy name, the non-accelerating inflation rate of unemployment (Nairu). All that word salad means is the rate of unemployment consistent with stable inflation.
There is also a bit of history on this topic at the Bank. When, ten years ago, Mark Carney took over as Bank governor, he was determined to do things differently. He launched “forward guidance” on interest rates, in contrast to the previous approach under which the MPC looked afresh at rates at each meeting. His version of forward guidance was that the Bank would not consider raising rates until the unemployment rate dropped to 7 per cent, which was not predicted to happen until 2016.
As it turned out, unemployment dropped quite quickly to 7 per cent, but the Bank decided it was too soon to raise rates — and Carney was on the way to his “unreliable boyfriend” reputation.
The point here is not to revive all that but to remind you that a 7 per cent unemployment rate, equivalent at the time to roughly 2.2 million people out of work, was thought to be close to the Nairu. Drop below it and higher inflation would be the result,
It was too gloomy a view. Although many say the Bank should indeed have begun raising rates at about that time, unemployment was to fall to less than 4 per cent before the pandemic without triggering a rise in inflation, which averaged less than 2 per cent in 2019.
What about now? Unlike in 2013, we start from a position in which pay is rising by 7 or 8 per cent, double or more the rate consistent with meeting and sticking to the 2 per cent inflation target.
In its August monetary policy report, the Bank predicted that by the third quarter of 2025, inflation would be back at 2 per cent, alongside earnings growth of 2.5 per cent and unemployment of 4.8 per cent — above the latest estimated rate of 4.2 per cent, but not by much.
The Office for Budget Responsibility (OBR) was even more sanguine, predicting an unemployment peak of 4.4 per cent, roughly 1.5 million, and for that to be consistent with average earnings growth of less than 2 per cent a year from next year onwards.
I would not expect that forecast to survive the revisions the OBR will make in the next three weeks. Both it and the Bank appear too optimistic. They suggest the economy will have a very soft landing and a near-painless adjustment to low inflation. Things that look too good to be true, usually are.
A feature of the pandemic was that while economic inactivity rose, the increase in unemployment was modest, perhaps because of the furlough scheme.
The previous two recessions, 1990-92 and 2008-9, resulted in increases in unemployment of between 55 and 65 per cent. That would imply a rise in the unemployment rate from last year’s low of 3.5 per cent to 5.5-6 per cent. Whether even that will be enough to keep a lid on inflation is the big question.
--
This message has been checked by Libraesva ESG and is found to be clean.
Click here to mark it as spam.
Click here to blocklist sender
How much must unemployment go up to keep a lid on inflation?
Those of you who follow these things will know that events have taken a bit of a turn in Newport. Not since Llanelli beat the All Blacks at rugby 50 years ago, a few dozen miles away, has there been so much excitement in South Wales.
The kerfuffle in Newport, home of the Office for National Statistics (ONS), has been about its closely watched Labour Force Survey (LFS) — and low response rates calling into question the accuracy of this key set of indicators for policymakers, including at the Bank of England. It has also created a dilemma for anyone trying to analyse this essential part of the economy, including me.
As things stand, the last full set of LFS data came out more than six weeks ago and covered the period to July. In terms of economic data, that is, if not ancient history, at least very backward looking.
In place of the usual LFS figures, the ONS put together an alternative set, some of it based on experimental data, which is why some economists have been inclined to treat the latest statistics with a large pinch of salt.
Peering through the fog, the new figures appear to confirm a picture of gently rising unemployment and gradually weaker employment, which has yet to get back to pre-Covid levels. Economic inactivity — the proportion of working-age people who are not part of the labour force — is running at just under 21 per cent, or 8.7 million people, higher than before Covid but lower than its post-pandemic peaks.
The first question is whether there is anything in these figures to prompt the Bank’s monetary policy committee (MPC) to raise interest rates from the current 5.25 per cent level this week.
The answer to that, taken in the round, is no. Wage growth is still too strong for the Bank’s comfort, but the labour market is loosening, and other activity indicators are weakening. The latest “flash” purchasing managers’ index, for this month, dropped to a nine-month low and suggested that the economy is at best limping along. The CBI’s industrial trends survey recorded another fall in manufacturing volumes, and a drop in employment in the sector.
The picture of a softer labour market is confirmed by surveys from the Recruitment and Employment Confederation (REC) and others. It is noticeable that a few months ago, many headlines were about worker shortages, which of course persist in some sectors. Now they are outnumbered by stories of job cuts and closures.
You can never say never with the MPC. Last month it surprised the markets with a narrow vote, 5-4, to keep rates on hold. This week it would be a big surprise if the committee were to vote to raise rates. Two surprises in a row would not be unprecedented but would be strange. The Bank should keep official interest rates on hold.
The second question is by how much unemployment needs to rise to deliver the lower pay increases consistent with the 2 per cent inflation target. There is quite a long history to this question. The Phillips curve, developed by the New Zealand economist Bill Phillips at the London School of Economics after the Second World War, explained the inverse relationship between the unemployment rate and pay growth: the higher the first, the lower the second, other things being equal.
The Phillips curve has undergone various modifications since, but remains a widely used concept, as does the “natural” rate of unemployment — or, to use its more common but clumsy name, the non-accelerating inflation rate of unemployment (Nairu). All that word salad means is the rate of unemployment consistent with stable inflation.
There is also a bit of history on this topic at the Bank. When, ten years ago, Mark Carney took over as Bank governor, he was determined to do things differently. He launched “forward guidance” on interest rates, in contrast to the previous approach under which the MPC looked afresh at rates at each meeting. His version of forward guidance was that the Bank would not consider raising rates until the unemployment rate dropped to 7 per cent, which was not predicted to happen until 2016.
As it turned out, unemployment dropped quite quickly to 7 per cent, but the Bank decided it was too soon to raise rates — and Carney was on the way to his “unreliable boyfriend” reputation.
The point here is not to revive all that but to remind you that a 7 per cent unemployment rate, equivalent at the time to roughly 2.2 million people out of work, was thought to be close to the Nairu. Drop below it and higher inflation would be the result,
It was too gloomy a view. Although many say the Bank should indeed have begun raising rates at about that time, unemployment was to fall to less than 4 per cent before the pandemic without triggering a rise in inflation, which averaged less than 2 per cent in 2019.
What about now? Unlike in 2013, we start from a position in which pay is rising by 7 or 8 per cent, double or more the rate consistent with meeting and sticking to the 2 per cent inflation target.
In its August monetary policy report, the Bank predicted that by the third quarter of 2025, inflation would be back at 2 per cent, alongside earnings growth of 2.5 per cent and unemployment of 4.8 per cent — above the latest estimated rate of 4.2 per cent, but not by much.
The Office for Budget Responsibility (OBR) was even more sanguine, predicting an unemployment peak of 4.4 per cent, roughly 1.5 million, and for that to be consistent with average earnings growth of less than 2 per cent a year from next year onwards.
I would not expect that forecast to survive the revisions the OBR will make in the next three weeks. Both it and the Bank appear too optimistic. They suggest the economy will have a very soft landing and a near-painless adjustment to low inflation. Things that look too good to be true, usually are.
A feature of the pandemic was that while economic inactivity rose, the increase in unemployment was modest, perhaps because of the furlough scheme.
The previous two recessions, 1990-92 and 2008-9, resulted in increases in unemployment of between 55 and 65 per cent. That would imply a rise in the unemployment rate from last year’s low of 3.5 per cent to 5.5-6 per cent. Whether even that will be enough to keep a lid on inflation is the big question.
--
This message has been checked by Libraesva ESG and is found to be clean.
Click here to mark it as spam.
Click here to blocklist sender
