UK Inflation

UK inflation, as measured by the CPI, fell in September to 2.4%. Not only was this below last month’s rate of 2.7%, it was also 0.2% below the expected rate of 2.6%. (Note we are talking of a fall in inflation, not a fall in prices).  Currency dealers believe that the effect of this was to make a further rise in interest unlikely and therefore there was a fall in demand for sterling, leading to a small fall in the value of sterling on the foreign exchange market.

However, it is not clear whether their reaction was correct. The day before these figures were issued, figures for average earnings in the three months to August were published by the Office for National Statistics, which showed that wages are rising at 3.1%, up from 2.9%, their highest rate since the financial crisis.  The rise in earnings is not surprising since it has been predicted ever since unemployment started to fall towards the current, record low level of 4% or 1.36 million.

The idea that inflation and unemployment are inversely related was expressed by Phillips using what became known as the “Phillips Curve”. Recently, economists have doubted it since unemployment has fallen without the previously-expected rise in earnings which would, in turn, feed through to prices via increased demand and higher costs for firms.

If the increase in real incomes continues, it is possible that higher spending and higher wage costs for businesses might increase inflation which, although falling, is still above the 2% target. It is also worth noting, firstly that uncertainty created by lack of progress in the Brexit talks might limit increases in consumption, secondly, that the increase in earnings is not likely to be shared by workers across the country and thirdly, unless the UK is able to increase its productivity, which is still low compared to our competitors, significant increases in earnings are likely to be limited.

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Brexit – considering some of the issues.

UK politics is in a state of turmoil. There are Tory MPs making public pronouncements about possible budget measures the Chancellor might include in his budget, the DUP are threatening to vote against the budget – something which commentators say might bring about the end of Theresa May’s premiership – and at the moment, less than six months before we leave the EU,  it is extremely difficult to predict whether a Brexit deal will be agreed between the UK and the EU, then ratified by Parliament and whether there might be a second referendum or even another election. Significant elements of our post-Brexit existence – namely the Northern Ireland border issue, the nature of any agreement with the EU on trade in goods and services and the movement of labour between the UK and the EU are yet to be agreed.

The possibility of a “No Deal” Brexit is still with us. This would mean that goods and services exported from the UK to the EU would have the same tariffs as those coming in to the EU from any country with which the EU does not have a trade deal  under what are referred to as “WTO (World Trade Organisation) rules”. It is also not clear whether we would be able to persuade countries which currently have trade deals with the EU to create identical deals for us once we leave. Although EU tariffs average 4%, our food exports to the EU would face a 15% tariff and our car exports (70% of our car exports go to the EU) would face a 10% tariff. Equally worrying to many producers are the non-tariff barriers such as customs checks which they would face. At present, because we are in the Single Market which gives free movement of goods, services, labour and capital, goods produced in the UK can be sold in the EU without needing to meet any additional safety checks or face customs delays at the border. UK financial service companies can offer their services across the EU and they would lose their ability to do this from London, hence a number are setting up offices in the EU. Many manufacturers now operate “just-in-time” methods of production where components and raw materials are delivered very shortly before they are needed, therefore avoiding the necessity of having money tied up in holding stocks and having to build large warehouses. There has been talk of how, with a hard Brexit, (i.e. no free trade agreement) small delays at customs posts could cause havoc for manufacturers. The head of Jaguar Land Rover talked of how they produce 3,000 cars using 25 million parts a day and how even a small delay would cause havoc and BMW has announced that, in the event of no deal, it will move production of the Mini and new electric Mini to the Netherlands

The Northern Ireland issue is tricky because of the way it goes beyond economics and into the religious and political history of the island. Without some sort of border between the EU and the UK, it would be possible for goods to flow into Northern Ireland and then cross into Eire without paying tariffs. Therefore, unless we have a free trade agreement with the EU, there must be a customs border between ourselves and the EU. For England, Scotland and Wales, this will be a sea border and existing customs facilities at ports and airports will deal (possibly with difficulty) with incoming and outgoing trade as they do at present for trade with non-EU countries. However Northern Ireland and Eire would either require a land border or an agreement which essentially keeps Northern Ireland in the EU for the purposes of trade and creates an imaginary border between Northern Ireland and the mainland – i.e.  separating Northern Ireland from the mainland, something the Government has pledged not to do. Because of the troubled history of Northern Ireland, a hard border (with customs posts, customs officers and possibly police) is not likely to be politically acceptable. It is also difficult in practice because there are many small roads between the two countries which would be impossible to police. Some politicians have suggested that technology might be able to solve the problem, somehow tracking the goods between Eire and the UK and ensuring that the correct duty is levied and paid to the EU. However, the UK’s record on introducing complex IT systems is not good and it is unclear whether this would be ready by the end of the transitional period before we totally leave the EU.

On the positive side, it is possible that, before you read this,  a deal might have been agreed but …………

How are we doing?

Those of you who are Manchester United fans will have been pleased by their comeback against Newcastle over the weekend. However, in the excitement, you might have missed the news that former United star, David Beckham, and his wife Victoria have sold their Beverley Hills house (or mansion) which has six bedrooms and nine bathrooms, for $33million. They bought it eleven years ago for $22milion. At the other end of the scale, you might also have missed the report from the Social Metrics Commission, (SMC) putting forward a new measure of poverty for the UK.

Measuring the number of people in poverty is difficult. Some countries, such as the USA, focus on absolute poverty where an income is identified as the minimum needed to meet a family’s basic needs and those below it are deemed to be in poverty. A variant of this approach involves estimating a minimum standard above which people should live. An alternative, which has become the benchmark for the UK, is to focus on relative poverty (i.e. compared to other people) and consider those in poverty as living in households with incomes below 60% of the median.  However this is not straight-forward since there are two different ways of considering income (before and after housing costs are deducted) and the measure excludes assets people possess.

The SMC focusses strictly on measuring poverty, which, for them, is not having the resources available to meet current needs to be able to “engage adequately in a life regarded as the “norm” in society.”

To assess the number in poverty they consider the resources available to households, namely net income (net earnings from employment and self-employment, benefits and unearned net income (e.g. from rent or interest). They also include assets, such as savings which can be easily accessed and subtract any costs that the family must pay. These costs include debt repayment, housing costs (rent or mortgage payments), service charges in flats, building insurance, council tax, water rates, the community charge, childcare costs and additional costs faced by the disabled. Subtracting these costs gives an estimate of the resources available to a household. The next stage was to estimate the required level of resources needed to meet their benchmark and then set a poverty line at a threshold of 55% of the three-year median resources available measure.

Using this approach, their key findings, using 2016/17 data, were that:

  • 22% of the population (14.2 million) is living in a family considered to be in poverty. However 52% of people in lone-parent families (2.6 million) are in poverty.
  • Of those in poverty, 8.4 million are working-age adults; 4.5 million are children and 1.4 million are pension age adults.
  • The poverty rate for working-age adults is 21.6%; for children it is 32.6%; and for pension-age adults it is 11.4%. For pensioners, the rate has fallen from 20.8% in 2001 to 11.4% in 2017.
  • The majority (68.0%) of people living in workless families are in poverty, compared to 9.0% for people living in families where all adults work full time.
  • Those in poverty are not equally distributed across the country. Poverty rates in Scotland are lower and Welsh poverty rates are higher than in other UK countries. England has the highest child poverty rate and the overall poverty rate in London is more than 10% higher than in some other English regions.
  • The report also found that the number of people (2.5 million) above the threshold by 10% or less is almost identical to the number of people (2.7 million) below the threshold by 10% or less, suggesting that small changes in circumstances can either take people out of or put them into poverty. However 2/3 of those in poverty (12% of the total population) have been in persistent poverty, (being in poverty for two out of the last three years), suggesting that although they might be close to the benchmark, it is not easy to escape from poverty.

The SMC findings raise questions about the benefit system and how we deal with poverty.

Are we happy that over half of single parent families are in poverty?

Are we happy that 2/3 of those in families where no one is working are in poverty?

Are we happy that twice as many working age adults and three times as many children are classed as living in poverty compared to the percentage of pensioners in poverty?