Good News. Really?

Recent unemployment and inflation figures released recently have shown that unemployment has fallen by 17,000 in the three months leading to the end of Feb and CPI inflation has fallen by 0.4% on last month to 4%. Could this mean that we are out of the woods and that we are on the road to recovery?

Well, it appears that the unexpected fall in inflation was mainly due to falling food prices (which fell by 1.4% on this time last year) and by increased exports (up 15% from this time last year). On the unemployment front, it appears that the fall must be due to the private sector as the spending cuts are increasing public sector job losses. I am surprised that unemployment has fallen as ONS figures have shown that wages grew on average by 2% in the year to February. This is well below the level of inflation and so indicates that real wages have fallen, which puts a squeeze on consumer spending power. This should reduce aggregate demand and therefore increase demand-deficient unemployment. I fear money illusion may be at work.

Getting back to my question, it is feared that once the public sector spending cuts have been implemented fully, unemployment will rise again. Also, if oil prices rise for many reasons ( eg increased global demand or Libyan crisis continuing) this will further increase inflationary pressures and put different kinds of pressures on the MCP to increase interest rates. In short, i dont think we are out of the woods yet. Although the recent figures are positive, the outlook continues to look rather bleak on the unemployment and inflation fronts. Maybe one way to solve both problems is to substitute automated processes with more labour intensive ones if oil prices continue to rise and wage growth remains stagnant.