Today’s labour market figures give us a reason to be slightly pessimistic about inflation.
This seems a perverse thing to say of a set of data which show that the unemployment rate has risen to a 15-year high of 8.3 per cent, and that wage inflation has fallen.
Instead, I’m thinking of two odd facts:
First, although employment fell by 197,000 (0.7 per cent) in the quarter, aggregate hours worked actually rose by 0.3 per cent.
Secondly, the last 12 months have seen the employment of UK-nationals fall by 311,000 (1.2 per cent) but that of non-UK nationals rise by 181,000 (4.6 per cent)*.
These two oddities are consistent with a single possibility – that there’s a mismatch between the pattern of supply and demand.
Imagine – which isn’t too hard – that demand for civil servants falls whilst demand for, say, oil engineers rises. We’d see unemployment rise as civil servants join the dole queues. But if they cannot quickly retrain as engineers, we would see some other things. We’d see existing engineers work longer hours, and we’d see vacancies filled by foreigners who do have the necessary skills.
And this is just what we see in today’s macro numbers – increased employment of foreign nationals and increased hours worked by those who are still in work.
I say this is inflationary because it implies that the unemployed workers are not bidding down wages very much simply because they have the wrong skills to compete for the jobs that are available. This is consistent with the fact that unemployment has risen at the same time as price inflation has crept up. An increased mismatch tends to raise the Nairu.
Now, you might object here that the figures show that wage inflation is low, suggesting that – contrary to my story – the unemployed are bidding down wages.
However, this is not an integral part of my story, for two reasons.
First, a mismatch can lead to prices rising without a rise in basic earnings, if employers have to pay for expensive overtime rather than hire more workers, and they pass this cost onto customers.
Secondly, my point is rather that a mismatch reduces the extent to which unemployment bears down upon wage inflation; it is not to deny such an effect completely.
My point here is not that inflation will stay high. Brute maths means it will fall a lot. I’m only saying that inflation might not collapse as much as one might expect from the weakness of the macroeconomy. This means there's a risk of CPI inflation being above two per cent next year rather than below it.
* That said, the latest quarter shows the opposite trend, but this might be due to unseasonally weak demand in sectors that employ migrants, such as agriculture and tourism.