High inflation + high unemployment = misery, misery, misery…

economy, finance, jobs

Author(s):  Tony Dolphin
Published date:  17 Nov 2011
Source:  Left Foot Forward

Latest forecasts suggest 2012 will bring some relief. This will be welcome, but it is likely to be many years before the UK returns to the desired combination of low inflation and low unemployment.

In the 1970s era of stagflation, economists devised a ‘Misery Index’ by simply adding together the inflation rate and the unemployment rate – the two economic variables people are assumed to care most about. Doing the same today reveals a grim picture.

Consumer price inflation in October was 5.0 per cent. Although this was down a little from September’s 5.2 per cent rate, thanks to discounting by supermarkets, it is still the second highest inflation rate recorded since 1992.

It also feels much worse because average earnings are growing at less than half this rate.

Unemployment in the three months to September increased to 8.3 per cent, up 0.4 per cent from a quarter earlier and its highest rate since 1996.

Combining the inflation and unemployment rates gives a misery index of 13.3 per cent for the data published in November – the highest since August 1992, just before sterling dropped out the European exchange rate mechanism.

UK-Misery-Index-November-2011
Although the Misery Index has leapt in 2011 to its highest level in almost 20 years, it has been steadily deteriorating since 2005. Following a ‘golden era’ from 2000 to 2004, when inflation and unemployment were both low, first higher inflation and then higher unemployment together with higher inflation have pushed the index steadily upwards.

Latest forecasts suggest 2012 will bring some relief. Although economic growth is widely expected to remain weak, leading to a further rise in unemployment, inflation should fall sharply as this year’s rise in VAT and large increases in food and energy prices drop out of the calculation.

This will be welcome, but it is likely to be many years before the UK returns to the desired combination of low inflation and low unemployment. Things are going to be pretty miserable for some time to come.

 
 

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Tony Dolphin, Senior Economist and Associate Director for Economic Policy