July 16, 2008 | posted by Michael Baxter in inflation |

And that devilish dilemma got a lot more devilish yesterday.

Inflation is up again. Now the CPI rate is 3.8 per cent. The highest level in 11 years. The retail price index was up to 4.6 per cent, and even core inflation with alcohol, tobacco and food taken out hit 1.6 per cent.

Food and non-alcoholic drinks leapt up by 9.5 per cent, petrol by even more. Now, it is widely expected CPI inflation will hit 4 per cent soon.

And yet. Wages during the same period also rose by 3.8 per cent. Interestingly, wage inflation both with and without bonuses was exactly the same this month.

The last time average earnings with bonuses rose lower than that was August last year. As for earnings before bonuses, they rose at their lowest rate since January.

The point is this. Despite media talk of a winter of discontent building, of strikes as unions spoil it all and demands of inflation-busting wage increases, up to now there is no sign of a secondary inflationary effect from rising wages at all.

Economic productivity is up around 1.7 per cent, so if you take productivity from wage inflation you get the true impact wages must be having on inflation. Right now, that is 2.1 per cent; just 0.1 percentage points off the Bank of England target.

The truth is we are not seeing real inflation at all. We are seeing rising prices. We are all getting worse off. That is not the same thing as inflation, or at least not the same thing as sustained inflation.

If prices rise and wages don’t keep up, we feel worse off. Demand falls. Prices then fall too. This is what is happening now. It will just take time for this to be reflected in the inflation data.