MR OSBORNE received a better press for his Autumn Statement than for his Budget in March.
The markets remained positive, held in check more by the Bundesbank’s pessimistic forecast for the German economy next year than the Chancellor’s lengthening austerity programme.
However, there is one dog that is refusing to lie down: the prospect of higher inflation derailing the Chancellor’s finely-balanced plans. While politicians fret about UK growth prospects, the real enemy to progress may be prices.
According to the Bank of England’s latest survey of attitudes towards inflation, published yesterday, the great British public thinks prices will rise by 3.5 per cent in 2013 – up from 3.2 per cent in the last poll in August. Worse, we are beginning to believe that inflation is going to accelerate even faster in the long term.
These instincts may be prescient. In October, the narrow consumer price index (CPI) jumped to an annualised 2.7 per cent, well above inflation in the US or EU. CPI inflation has remained stubbornly above the Bank of England’s nominal 2 per cent target since December 2009. The Bank’s claims that inflation will moderate have proved alarmingly and persistently inaccurate.
On the contrary, buried deep inside the data tables that accompanied the Autumn Statement, the conservative Office of Budget Responsibility is forecasting that broader RPI inflation (which includes all-important housing costs) will go up by nearly 10 per cent over the next three years.
This bodes ill for wage stability when the 2013 pay round opens in March. The Chancellor’s Autumn Statement allowed for a 1 per cent rise in public sector pay. But the existing three-year pay freeze has seen local government earnings fall by 13 per cent in real terms. Expect a pay claim to compensate.
In 2011, working days lost through industrial action were 12 times that of 2010, and the highest figure since 1990. The actual number of workers involved was 1.4 million, by far the most we have seen in two decades. This year looks no better. Days lost till the start of September were 1.2 million, which means they should overtake the 2011 peak.
Two factors may explain high inflation in the UK. One is that the very large fall in output since 2008, coupled with a relatively small fall (by historic standards) in employment, has created demand inflation. The second is that the 25 per cent depreciation in the value of sterling has boosted import costs.
Paradoxically, wage increases may actually add to demand pull pressures on prices. And if the credit ratings agencies downgrade Britain’s triple-A status in 2013, sterling will fall even further. Time to buy gold?
US cannot ignore the elephant in the room
GOOD news for Christmas: US employment jumped by 146,000 in November, reducing the jobless rate to 7.7 per cent from 7.9 per cent.
Hurricane Sandy had been expected to hold back recovery in the labour market. Retail employment rose by 53,000, suggesting there are more customers about this holiday season.
That should give a bit of cheer to investors as they face the prospect of the US economy dropping off a “fiscal cliff” in January if there’s no resolution of the budget crisis.
A new poll says 53 per cent of Americans will blame the Republicans if negotiations fail, but just 27 per cent will blame President Obama. Will the Republicans blink first?