It was not just unemployment that is dire. Real take-home pay after tax and inflation continues to fall sharply. Total pay (including bonuses) rose just 2.3 per cent on a year earlier; regular pay (excluding bonuses) rose by 1.7 per cent. In real terms, after adjusting for the retail price index, total average earnings are now down by eight per cent from their February 2008 peak. Real earnings before bonuses are down 7.4 per cent in real terms from their January 2009 peak, according to an analysis of the official figures by Europe Economics. The UK remains a poorer place than it was several years ago in terms of how much output it produces – and this is being reflected in the lower take-home pay of its workers. The reason why the drop in real wages is greater than the 3-4 per cent remaining drop in GDP is because Britain’s terms of trade have deteriorated sharply, and sterling is down by between a quarter and a fifth.
The Bank of England was also extraordinarily gloomy on growth yesterday. It now thinks GDP will expand by about one per cent next year, with risks to the downside; I’m afraid that its pessimism sounds warranted, especially given that the Eurozone continues to deteriorate by the day. Its inflation forecast is far less plausible, however: the Bank is right that price rises have peaked for the time being and will fall back – but it goes too far in believing that inflation will collapse to under its target.
The current gradual reduction in price pressures will continue into next year: the consumer price index (CPI) measure of annual inflation – the government’s target – was 5.0 per cent in October, down from 5.2 per cent in September. The retail price index (RPI) was up 5.4 per cent in October, down from 5.6 per cent in September. But as Milton Friedman famously said, the impact of monetary action is always tough to assess because of the long and variable lags between the change in policy and its effect. The latest £75bn in quantitative easing is bound to have an impact on consumer prices at some stage, as will all the extra quantitative easing on top of this implied by the Bank’s forecasts yesterday. For the chancellor, there is just one ray of light. He won’t have to worry too much about selling his gilts: the Bank will be buying up even more than he can print.
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