From the TUC

How will today’s inflation figures affect jobs and pay?

15 Feb 2011, by in Economics

The latest inflation figures are very depressing. Using the Consumer Price Index that the government favours, prices are going up at a rate of 4.0 per cent a year – up from 3.7 per cent last month. Using the Retail Price Index that most union negotiators prefer, the figures are even worse: 5.1 per cent, up from 4.8 last month. The fact that the CPI is so much lower than RPI means that the government’s decision to switch to CPI for uprating benefits and public service pensions is going to hit a lot of people on low incomes. Its also going to increase the pressure for a substantial increase in interest rates that could end up costing thousands of jobs.

As it happens, just after the figures were published I gave a talk to the annual Pay Bargaining Conference we organise with Incomes Data Services about the difference between CPI and RPI. Last year the government decided to switch to using CPI to inflation-proof benefits and public sector pensions. Now, on average, CPI produces yearly increases that are lower than RPI by about 0.7 per cent. This doesn’t sound a lot, but it means that over time people who rely on these benefits and pensions are going to be worse and worse off. Here’s a chart I used to illustrate this:

CPI and RPI

I started with someone with a pension or benefits worth £10,000 a year in 1988. Each year it is increased in line with inflation, the blue line is CPI, the red dotted line is RPI. By 2010 the difference is more than 16% – the CPI increased amount is 18,035, the RPI increase produces 20,935.

But if the gap between CPI and RPI were as big as it is in today’s figures, the gap after twenty years would be more like 25 per cent.

The other thing that worries me about these results is the fact that they’re simply so high. Four per cent is twice the Bank of England’s target for inflation, and the pressure to raise interest rates substantially  is going to be harder to resist after the publication of these results.

We can probably take an increase of a quarter or half a per cent, but a rise of a percentage point or more will push up the exchange rate, make it harder for businesses to get finance and slash domestic demand. As I’ve argued before, an increase on that scale could  send the economy back into recession.  We already have the National Institute for Economic and Social Research saying that “the underlying level of GDP appears relatively flat over the last few months” and the Chartered Institute for Personnel and Development’s survey of HR managers showing that “redundancy intentions have risen to their highest level since the survey began across the whole economy.”

The economy is at a crucial moment – the next couple of months could see whether the recovery continues or we slide back into recession. Even if we avoid the worst outcome, the propsects for employment don’t look too bright.

2 Responses to How will today’s inflation figures affect jobs and pay?

  1. Tweets that mention How will today’s inflation figures affect jobs and pay? | ToUChstone blog: A public policy blog from the TUC — Topsy.com
    Feb 16th 2011, 12:07 am

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  2. Tacitus
    Feb 16th 2011, 1:07 pm

    The unemployment figures today are worrying and Tory approaches to solve it through the Work Programme won’t wash. The scheme will essentially repeat the same ‘black box’ approach that providers adopted for FND – and hard evidence says it didn’t work.

    Only a small percentage of people on welfare to work programmes manage to secure full-time work, so how can the Tories say the new scheme will be any better?

    If you are unemployed, or about to be made redundant, the future looks rather bleak. The TUC needs to campaign vociferously for more support for these people.