Thursday, 20 January 2011
What does recent average earnings data tell us about inflation?
The monetary policy committee place enormous importance on this chart. It illustrates recent movements in average earnings.
The Bank of England believe that wage inflation remains under control. They look at this chart and they see no upward trend. I can't see one either. I see a strange blip in the spring of last year. Beyond that, wage inflation seems to be hovering around the two percent mark.
However, average earnings data can be quite treacherous. First, data quality has always been an issue. Second, and much more importantly, there is a lengthly time lag with these numbers.
The most recent published number covers the period up to July, whereas the latest inflation data covers December. It may well be that average earnings have picked up over the winter months. We will only know if this is true in about five months time. The latest average earnings data may be telling us very little in terms of current inflation dynamics
Whatever we may learn about recent wage developments, the cold hard reality is that the UK now has a serious inflation problem, which could very easily spin out of control.