A sense of perspective can give us also a direction of travel so here is this from Sir Jon Cunliffe of the Bank of England yesterday.

The unemployment rate in the UK today is 4.3%. The last time it was that low was 1975 – the year I
graduated from university.
That year, average wages grew by 24%. 42 years later, with unemployment at the same level, whole
economy average weekly earnings grew by 2.2%

Oh and just as a reminder as Sir Jon omitted this bit the wage rises were not a sign of economic triumph as inflation ( measured by the Retail Price Index or RPI) rose to 26.9% in August of that year. Also this is an innovative way of describing a period when RPI inflation went over 5% for a while as the Bank of England sat on its hands.

 energy price inflation between 2010 to 2013;

Actually innovative ( for newer readers this word was twisted in the Irish banking crisis and now in my financial lexicon for this times has an ominous portent to it) move was to claim this.

That is why the Bank of England has a clear primary objective of price stability and a forward-looking inflation
targeting remit. We have an objective to support the government’s economic policy but it is a secondary
objective and subject to the first.

The truth is that it is the other way around as the inflation surge in 2011 that I pointed out earlier or the current phase where the Bank of England cut Bank Rate and expanded QE into an inflation target overshoot proves. In terms of Yes Prime Minister being willing to state things like that would be a qualification for a knighthood or as it described it a K. Indeed another potential qualification for a K might be to write and say this.

Central bank credibility is crucial to anchoring inflation expectations………. Arguably we are only now discovering the impact at very low levels of unemployment of the Bank of England’s credibility as an inflation anchor.

Apparently it is doing this right now while inflation is overshooting! Quite how this triumph fits with the credit crunch era is another fantasy which skips reality.

Wage Growth

There is reality expressed here.

Equally strikingly, that 2.2% is about the same rate of wage growth as in 2011 when unemployment rose
above 8% for the first time since the mid-1990s. Over the following 6 years unemployment has fallen quickly
and continuously but nominal pay growth has largely remained bound between 1 and 3%.

If you think this through logically then this is a basis for my argument that rather than aiming for an inflation rate of 2% per annum you should go lower and then we should find some real wage growth. Also it is sad to see a policymaker skip what are the major issues and causes of what is happening.

I noted above that changes in the world of work have very possibly changed the pricing power of labour and
workers’ appetite for risk (i.e. job insecurity). This is in itself a large area of current debate and I do not want
here to go into these in great detail.

The theme seems to be why look at relevant issues when you can continue to chew over the continuing failure of the Phillips Curve which gets pages and pages as opposed to this one paragraph below.

Some of these important changes in the structure of the labour market, such as the rise in self-employment
and decline in union membership, predated the financial crisis. Others, like the rise in temporary work and
zero hours contracts, are more recent. Technology – and the rise of the gig economy – has further
increased what my colleague Andy Haldane has called the ‘divisibility’ of labour.

Real Wages

It is simply astonishing that a man who voted for the monetary policy easing in August 2016 ignores its role in this.

Inflation is currently above target as a result of the post referendum depreciation of sterling and forecast, for
that reason, to remain so over the next three years.

I find it odd that they forecast the fall in the Pound will keep inflation above target for the next three years because as I explained yesterday the major effects are pretty much behind us now. The inflation Forward Guidance gets odder and indeed somewhat bizarre when you read this.

Domestically generated inflation pressure, however, appears low……..Bank staff calculations suggest that adjusted for this effect indicators of domestic inflation pressure are below levels consistent with the 2% target.

Oh and those who had to make calculations back when inflation was just below 27% are permitted a wry smile at this description of 4% inflation ( using the RPI index).

Measuring domestically generated
inflation when externally generated inflation pressure is high, as at present, is not straightforward.

The general Bank of England view is that wage growth is about to pick up and of course that has been true for years now but specifically it is based around this.

3 month on 3 month annualised AWE growth for regular pay is 2.9%.

As ever central bankers are cherry-picking the data as individuals will care most about total pay. However Sir Jon is less convinced by thoughts of a rise in wages although whilst he does not put it this way they are likely to be supported by lower inflation.

there is in my view a not immaterial risk that the
trade-off is not as it currently appears and that domestic inflation pressure will undershoot the Committee’s
collective expectation.

Today’s Data

This was another disappointing day for the Forward Guidance of the Bank of England.

Between July to September 2016 and July to September 2017, in nominal terms, both regular pay and total pay increased by 2.2%, little changed compared with the growth rates between June to August 2016 and June to August 2017.

This meant that real wages did this and for fans of the RPI subtract around 1%.

Latest estimates show that average weekly earnings for employees in Great Britain in real terms (that is, adjusted for price inflation) fell by 0.4% including bonuses, and fell by 0.5% excluding bonuses, compared with a year earlier.


There is fair bit to consider here. In my view the views of the Bank of England are driven mostly by an attempt to avoid having to say that the monetary policy easing of August 2016 was a mistake. The majority in favour of this month’s Bank Rate rise do so by optimism on the wages front although of course there is a weakness there as we currently have fallen real wages. Sir Jon Cunliffe avoids it by thinking that inflation will be weak looking ahead.It remains a shame that whatever their views they continue to persist in their beliefs around the Phillips Curve. Sometimes I wonder what it would take for them to abandon it and put it in the recycling bin?

There was a hopeful sign in today’s data which is summarised below.

*U.K. 3Q OUTPUT PER HOUR RISES 0.9% Q/Q, FASTEST SINCE 2Q 2011 ( h/t @stewhampton)

Economics is not called the dismal science for nothing as we note a possible trajectory change as there were fewer hours worked  ( and indeed a 14000 fall in employment). But we have been looking for a productivity rise and this is one of the first signs of it and any continuation would be welcome. Also my first rule of OBR Club may well be in play as of course it ( and the Bank of England) have just downgraded the UK productivity outlook. Sometimes you really couldn’t make it up!