Why the devil is always in the detail

AT LAST, proof of what we had all been suspecting: official measures of inflation have failed to pick up actual price rises. Yesterday’s Inflation Report from the Bank of England contained a fascinating gem: the revelation that consumer price index (CPI) inflation has been underestimated by 0.3 per cent a year for the past 12 years as a result of an astonishing blunder by the hapless Office for National Statistics. The difference on the retail price index (RPI) measure of inflation was even greater – prices were going up even faster than the government had been telling us. The ONS over-estimated the extent of the collapse in clothing costs from 1997 to 2009, seemingly because it focused on prices during the sales and forgot about the rest of the year.

This may seem like a small error but it was a major gaffe. Interest rates would undoubtedly have been higher every year during the bubble had the Bank known prices were going up as much as they were. Even half a per cent more on rates would have dampened credit growth and property prices; the bubble wouldn’t have been as bad. And anybody with contracts, bonds or pensions linked to inflation lost out because of the errors.

While King’s revelations came out of the blue, the poorish employment figures were less surprising given the slowdown during the last quarter of 2010. Youth unemployment is once again a shameful blight on British society. But the labour market performance last year was more balanced than the headlines in other media might suggest. There were 500,000 job vacancies in the three months to January 2011, up 40,000 from the three months to October 2010 and up 20,000 from a year earlier, once again highlighting that skill and attitude shortages are a major issue.

The number of people in employment was 29.12m in the three months to December 2010, down 68,000 from September but up 218,000 on a year earlier. In other words, employment rose by 0.8 per cent last year – even though public sector employment fell by 77,000, or 1.3 per cent. The badish news is that all of the annual rise was made up of part-timers, with the number of full-time jobs down by 5,000.

However, total hours worked per week were 924.6m in December 2010, up 3m from the September 2010 and up 16m (or 0.8 per cent) on the year. And even though UK GDP supposedly grew by just 1.4 per cent last year, the private sector created an extra 1.3 per cent jobs (296,000, to be precise) including a net rise in full-timers. The private sector is easily making up for public sector job cuts, which have come earlier and faster than predicted. However, it didn’t grow enough to keep up with the labour force, which is why unemployment rose by 40,000 in the three months to December 2010, compared with a year earlier. The number of people on Jobseekers’ Allowance in January 2011 was 1.46m, up 2,400 on December but down 157,100 on a year earlier. This is not an especially useful figure. As the welfare reforms kick in, and criteria on benefits are tightened, more people will be reclassified as out of work on that measure, rather than sick.

So far, this has not been a jobless recovery, contrary to what many have claimed. But much more needs to be done to help the jobless: the coalition needs to make it easier, cheaper and safer for firms to take on staff. Real action, rather than speeches about the Big Society, is urgently required.

allister.heath@cityam.com
Follow me on Twitter: @allisterheath

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