Chancellor Phillip Hammond
The latest consumer price inflation (CPI) data showed a sharp acceleration in prices increases. This will have a negative effect on real wages and real incomes, once inflation is taken into account. Most workers are facing flat wages and the poor, who rely on social welfare and are seeing freezes or cuts, will all be poorer as a result. Even worse, economic trends suggest that this problem will deepen.
Chart 1 below shows the medium-term trend in real wages. It uses single month data rather than the more customary rolling 3-month average data highlighted by the Office for National Statistics (ONS) to smooth out monthly fluctuations. However, the single month data can be superior in identifying key turning-points. As the chart shows, it seems likely we have entered a key turning-point, with a sharp downturn.
Chart 1. Real Average Weekly Earnings, January 2008 to January 2017
This is even more apparent in a ‘close-up’ of the same data focusing in the more recent period since the beginning of 2016 in Chart 2. This shows that real average weekly earnings fell by 0.2% in January compared to a year ago.
Chart 2. Real Average Weekly Earnings, January 2016 to January 2017
In the immediate period ahead the fall in real average weekly earnings is set to become more pronounced. In February, the acceleration in inflation saw the CPI jump from 1.8% from a year ago to 2.3%. There was zero inflation as recently as 18 months ago. It is extremely unlikely that wages will have kept pace with the recent jump in prices. So real wages are set to fall more sharply in the next few months.
Over the medium-term, these negative trends are likely to worsen. The complacency about inflation following the slump in the exchange rate value of the pound is misplaced. Devaluation effects take their time to work their way through the economy.
The pound slumped by 31% in the period from end 2008 to early 2009. But CPI inflation only peaked at 5.2% around 2½ years later in later 2011. This time around the devaluation is a little more than half the previous fall, which should limit the scope of price rises. But there is no reason to believe the period of rising prices will not be similarly prolonged.
This means that the fall in real incomes will also be similarly prolonged. The real wage slump will be deep and long.
This post first appeared on Socialist Economic Bulletin.
The first two sentence are a tortuous way of saying that the latest data shows that inflation measured by the CPI is rising thereby putting increased downward pressure on real incomes.
“However, the single month data can be superior in identifying key turning-points.” It is also more likely to highlight spurious effects. How do we know which is which? By looking at the 3-month, or more, averages!
“As the chart shows, it seems likely we have entered a key turning-point, with a sharp downturn.” How does it show that? The variations in the graph line show that it is impossible to predict a trend just by looking at short-term graphs.
“Chart 2. This shows that real average weekly earnings fell by 0.2% in January compared to a year ago.” But it also shows that real wages increased for the recent period except for one month. We shouldn’t just cherry pick the bits which happen to suit our chosen narrative.
All the predictions based on short-term data are suspect. Economics (all schools) does not have a good track record in predicting what the economy will do. Any attempt to do so will need to be based on analysis of underlying factors and not by looking at graphs of short-term changes.
It may well be the case that real wages are likely to decline but this cannot be predicted with any confidence on the basis of TO’L’s analysis of short-term trends. Not being an economist I look to articles on economic problems hoping to learn something. That didn’t happen in this case.
More useless statistics from O’Leary. For socialists the interesting statistics are what is happening to wages for the majority of ordinary people on wages below that deceptive “average” . By definition the “average” wage figure is massively boosted by the minority on mega wages and bonuses- the small executive/professional group whose continuing prosperity entirely fueled the Tory claims that “wages were rising” over the last few years.
The reality is that most people have seen the value of their incomes decline relentlessly since the 2008 Crash, alongside the value of the “social wage” , ie, social and welfare provision, as the Tories dismantle the Welfare State.
This is indeed a trend likely to continue. It’s just a pity that we all know from all of O’Leary’s past posts that this article’s entire purpose is to associate this fall in incomes , and rising inflation, directly to Brexit.
In reality any significant “Brexit Effect”, other than the , undoubtedly significant, fall in the £pound’s relative value (which is double edged in impact because it massively assists exports ) is still in the future . The current fall in real wages and rising inflation would have occurred within the disfunctional UK economy , with the Tory Austerity agenda, regardless of the Brexit decision – as part of global stagnation and endless Quantitative Easing money printing put to unproductive , inflationary, purposes.
O’Leary draws no conclusions from his article. So what was it’s point ? Just to spread gloom about Brexit. Hopeless . WHY does Left Futures regularly print this stuff ? O’Leary is a relentless supporter of the neoliberal EU status quo..
British capitalism is free falling into an abyss. That is why Britain voted Brexit because UK capitalism cannot even compete in Britain let along the ESM and of course in that case there is no need to mention the psychotic delusions of the super neo-liberals who think the EU was merely an obstacle to Britain’s renewed domination of the world. Of course Brexit is not going to save UK capitalism. Far from it. Putting up the barricades is only going to show just how dead it is so if Brexit is to mean anything or anything rational then it has to mean socialism. It is up to the labour movement to struggle for its own perspective for a post-Brexit Britain and a New European Settlement against that of the far right. It is now a struggle not of Hard versus Soft Brexit but Socialist versus Far Right Brexit. If the Labour Party gets sucked into a Soft Brexit Unpopular Front it is finished and it looks like it is being with Keir Starmer who is going to be its face for the next two years whilst Corbyn bumbles along in the background.
We should demand no negotiations with the wretched EU. Neither this Tory government nor the EU can be trusted to arrive at anything that is remotely in the interests of the working class or Britain or Europe as a whole.
Immediate withdrawal and an immediate general election to be fought by a Labour Party with a radical socialist programme for a post-Brexit Britain and its own notion of a New European Settlement that favours workers over bosses by not treating them like migrating cattle or tethered donkeys abandoned in sink communities, sink estates and sink schools unable to compete for the lowliest local job.
As for Scotland if the left are to revive there and overcome the disastrous legacies of Scottish Labour and the SSP implosion then it must support a Yes vote for independence in any referendum whilst putting its own socialist programme for a post-Westminster, post-EU Scotland and the kind of Europe it would like to see that leaves the EU in the dust. This is a golden opportunity for the Scottish left to gain its own independence from the Westminster Labour Party, the sects and the SNP.
Yes the Neo-Liberal drive for cheap labour continues as £60b of additional quantitative easing is pumped into the economy to deal with Brexit as Streekt argues because the rich and powerful “haven’t a clue what to do.”
Perhaps business won’t invest (constant capital) and attacks wages (variable capital) as a source of profit and capital’s latest ruse is to make working people work for more years, some from 65 to 66 from 2018 then under 45s to 68 then 20 year olds until they are 70 (getting more labour power over time, more bang for their bucks!).
As socialists we should free time poor working humanity and have 3 (ideally) or at least 4 working day weeks with good pay or at least 35 hours to begin with (to aid time poor working humanity) and retirement for all (for those who want it) at 65!
Working people are being robbed again but this time of perhaps the best years of their lives when they retire, when they are finally free to do what they want and to follow their interests, hobbies, leisure and dreams!
But of course the Tory/Lib Dem/New Labour Right political decision of austerity and wage freezes and now 1% wage limits (if you are lucky) with inflation now at 2% means a reduced spending capacity overall for the consumers of commodities and perhaps it is the dangerously high levels of personal debt and the old credit card (as people live for today) that also contributes to a sluggish economy.
Solution: state-led public investment, windfall taxes big business, a financial transaction tax, serious taxes on the rich and powerful and big business corporations, closing tax loopholes and tax havens, more democratic public ownership, free public transport (especially buses), massive curbs on the upper class welfare estate, a redistribution of wealth with good pay increases and interesting jobs (managers and unions should be tasked in making jobs interesting and varied at work for those who want it) – all of which would grow the economy out of recession and perhaps this becomes a model for progressives around the World – in short a left wing democratic socialist economic programme and we need dynamic business too.
A more dynamic business should be one that analyses, draws on reeaerch, thinks critically, involves staff and gives them a voice, seeks and acts on customer feedback (where are the feedback forms in pubs and restaurants?) and pays and treats people well plus accepts trade unions.
Socialists recognise (particularly small businesses) are often people’s dreams and whilst we should always promote cooperative business ideals there is a place for business too as long as it is fair and ethical.
And business (especially big business) needs to remember that they are there to serve working and working people are not here to serve big business!
It is great this site is look at policy and it will be interesting to read the one on the economy.
65 to 66 from 2020.
https://www.theguardian.com/business/2017/apr/12/living-standards-fall-first-time-since-2014-uk-inflation-pay-growth
Living standards in UK fall for the first time since 2014