More misery ahead for UK households with the publication of the latest inflation figures by the Office for National Statistics (ONS). CPI inflation rose to 5.2% in the 12 months to September 2011, the highest rate for 3 years, while the RPI hit a 20-year high at 5.6%. Increases in gas and electricity bills and transport costs were the main contributors to rising inflation during the last month.
With inflation breaking through the 5% mark and unemployment heading towards 9% (currently at 8.1%) the Misery Index is also breaking a few records. Popular in the 1970s and 80s, the index is just about as simple an economic measure as it gets – just add the inflation rate to the unemployment rate – which, at 13.3%, is the UK’s highest for 17 years. Across the Atlantic, it hit a 28-year high at 13%.* The Misery Index was introduced by economist Arthur Okun – adviser to US President Johnson during the late 1960s. The current level of misery indicates just how severely households are being squeezed on both sides of the Atlantic. Despite the Bank of England’s optimism that inflation will drop back below 5% by early 2012, the same cannot be said for unemployment, which is likely to carry on rising. How do we know this? We can thank Arthur Okun again for his simple ‘rule of thumb’ (aka Okun’s Law) – namely that when an economy experiences zero real growth (as in the UK), unemployment will continue to rise by around 0.3% per quarter. Indeed, according to Okun, growth of 4% is required merely to stabilise the level of unemployment, let alone reduce it.
Of course, we should note that the original rule related to data gathered between 1948 and 1960. Today we can at least halve the annual growth rate needed to stabilise unemployment – namely 2%. However, with growth in the UK unlikely to reach this kind of level – and much more likely to be negative in the short term – the probability is than unemployment will continue to rise throughout 2012. Misery, indeed.
* As reported by Reuters