Can falling inflation deflate our fears about the economy?

More good news came through the presses this week. After last week’s reports that unemployment has fallen by 0.2 percent since the beginning of the year, we now know that inflation is falling as well. With the CPI now at 3 percent on the last 12 months, the costs of many goods is not growing as quickly as we’ve recently experienced.

Cities Outlook 2012 showed how high inflation and slow wage growth are making us feel the pinch. This week, that trend continues with total wages falling to 0.6 percent growth from last year, and they grew just 0.3 percent for the private sector. With 3 percent inflation, the average private sector worker saw the price of goods grow 10 times more than their wages.

What does this mean exactly? Think about it this way:

Say your take home pay was £1500 per month last year, and you spent £1200 of it each month. The increase in wages is modest; £4.50 is enough for a pint and a bag of crisps. But, taking into account inflation, you actually end up with £31 fewer pounds a month in order to maintain the same quality of life—sans the extra pub grub.

Effects of wage increase and inflation for an average private sector worker

In some cities, workers saw their wages decline in real and nominal terms between 2010 and 2011, and it would not be surprising if the trend is continuing. Those places which have experienced the slowest wage growth overall, including Ipswich, Aldershot and Reading, are going to continue to feel their budgets tighten, even more so than the nation as a whole. Getting inflation under control is even more important in these places where wage growth has been low or negative.

The recent Daily Mail report showed the relative costs of living in the North and South of England, and it provides insights into how inflation and wage changes affect different parts of the country. The Centre is interested in expanding this research in the future to show how cost of living varies across cities.

So, while the fall in inflation is good news, the current state of affairs leaves the average worker worse off. Economic pressure on businesses, uncertainty around the market and high labour supply may all be keeping wages down. While falling inflation is essential to making us all better off, wider changes in the economy will be necessary for spending power to rise. 

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Comments

[Larry Sportello]

No doubt wages are falling in real terms, but your 10x claim is a bit of a stretch.

The ONS total pay figure is not a good indicator to use in this instance since it includes bonuses and can be swayed heavily by a small number of employees receiving smaller bonuses than the year before. The regular pay figure is better and showed a 1.9% annual increase in the private sector and 1.6% overall. This is more consistent with data on pay settlements in the private sector - so the amounts actually being received by staff (rather than average earnings which can be affected by changes in labour market composition) - which are averaging around the 2.5-3% mark according to pay data specialists XpertHR and IDS.

[Zach Wilcox]

Private sector wage growth was, in fact, skewed by record-low bonuses in the city. But, we both agree that as long as inflation is outstripping wage growth (be it ten times or two times), people are going to feel worse off economically. Negative average wage change (both nominal and real) is a very real issue in cities across the UK as well.