Bill Jamieson: RIP deflation, but jobless data is grave

Some bereavements in the economy we choose not to mourn. The most striking of these of late is the sudden Death of Deflation.
In the past year, 34,000 women have left the labour market. Picture: GettyIn the past year, 34,000 women have left the labour market. Picture: Getty
In the past year, 34,000 women have left the labour market. Picture: Getty

The burial has been swift, and no flowers were sent by request. But passing mourners have left jars of Marmite on the grave. And to this sorrowful pile, bars of KitKat have now been added as Swiss food giant Nestlé said it too would be raising prices in the UK to compensate for the effect of the plunging pound.

So sudden has been the demise that it is hard to recall the deep concerns that long prevailed over the spectre of deflation and its economic damage.

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All that has gone, replaced by dark forebodings of sharply rising inflation once “the full Brexit effects” have 
kicked in.

The annual rate of inflation as measured by the Consumer Price Index (CPI) jumped from 0.6 per cent last month to 1 per cent – a two-year high, but still half the Bank of England’s targeted rate of 2 per cent. But what might earlier this year have been hailed with relief unleashed great apprehension about how high the inflation rate might go, bearing in mind that the full effects of a sharp fall in the pound have still to work through.

The fall in sterling – down some 23 per cent since late 2015 and 17 per cent since the Brexit vote – will almost certainly see inflation rise further. Many commentators fear it will overshoot the Bank’s targeted rate of 2 per cent next year and peak some time in 2018. And with average earnings rising by just 2.1 per cent, a squeeze on real, after-inflation income looms ahead.

The unmourned Death of Deflation is likely to trigger another bereavement – the Death of Ever Falling Interest Rates.

Latest signals from the Bank are that rates are likely to be held at their current ultra-low level of 0.25 per cent rather than being cut further as Governor Mark Carney had hinted just two months ago.

Back in July, the Bank cut interest rates from 0.5 per cent and announced further Quantitative Easing to boost bank lending. It is hard to see what stimulative effects these have had, though they may have helped to avoid an economic slowdown sharper than the one now under way.

Which brings us to a third bereavement, where mourning could soon be in full swing – the end of the era of ever-falling unemployment.

Headline figures last week suggested no cause for grief: numbers in work in Scotland have continued to rise. But a closer look at the numbers unearths a darker undertone.

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True, unemployment in Scotland fell by 25,000 over the summer to its lowest level since 2008, with Office for National Statistics (ONS) data showing the rate between June and August had fallen to 4.6 per cent, below the figure for the UK as a whole at 4.9 per cent. And there were 54,000 more people in employment now compared with the pre-recession peak in May 2008.

The Scottish Government said Scotland was outperforming the rest of the UK on unemployment, female employment and inactivity rates. But the employment rate here also fell, albeit slightly, down 0.1 percentage points to 74 per cent, and remains lower than the UK level.

So what explains this discrepancy? Amid all the labour market figures is a category called “economically inactive”.

These are likely to be people neither in work nor available for work. About a quarter of this total is thought to be in full-time education and another quarter looking after their families. More than 20 per cent are believed to comprise the long-term ill.

Now I’m not sure these categories account for all the “economically inactive” – there may be many working in what is politely called “the informal economy” and very much “economically active” or who occupy that twilight zone of irregular freelance activity between inactivity and full-time work. But whatever the composition, the puzzling fact is that the number of economically inactive people – and women, in particular – has been rising fast.

In the past year, some 34,000 women of working age left the labour market – the total here now extends to 462,000, up eight per cent over the period. Meanwhile the UK figure has gone down. The inactivity rate in Scotland now stands at 22.5 per cent, while that in the UK is at 21.3 per cent. That may be insignificant given the difficulty in recording these numbers with pinpoint accuracy. But the figures have been diverging for the past year.

The data may be affected by the ongoing fallout from the massive hit to Scotland’s oil and gas sector with the plunge in the price of oil since late 2014. This has rippled across the wider Scottish economy as specialist engineers and service providers have suffered a drop in business. But it is all guesswork at present because no detailed survey has been undertaken.

Scottish Secretary David Mundell has said it is worrying that employment had fallen and that more people were dropping out of the labour market in Scotland when the numbers in the rest of the UK were up.

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And Liz Cameron, chief executive of the Scottish Chambers of Commerce, has added her voice to concerns. “The large fall in unemployment,” she comments, “is good news but overall levels of employment in Scotland have fallen, economic inactivity is rising, as has the number of those claiming benefits.”

Given the predicted economic slowdown ahead – and with Scotland’s economy set to continue faring worse than the UK’s – it is hard to see how a rise in the absolute level of unemployment can be avoided.

All now rests with the Chancellor’s Autumn Statement on 23 November to provide a check on the fall-out from these bereavements. We will need more than comforting words.