Zero RPI Inflation plus Recession equals Pay Depression

Dr Philpott continues:

"What a difference a year makes. Last spring's exaggerated warnings of an impending inflationary 'pay-price spiral' seem a million miles away from today's official figures showing that the UK economy is experiencing zero inflation on the RPI measure, which at least 8 in 10 employers use as the cost of living benchmark when deciding on staff pay awards.

"For millions of workers this will be a 'spring and summer of pay depression' as pay rises give way to widespread pay freezes or pay cuts. This is an exceptional experience. When the UK last entered an annual pay round with zero RPI inflation, Elvis was still in his pomp, Cliff Richard was still hip and the Beatles were still unknown. And at that time the trade unions were still strong enough to prevent pay from falling along with prices. But in today's flexible labour market pay is better able to adjust downward when inflation falls.

"With highly expansionary monetary and fiscal policy and a weak pound set in due course to generate a return to tolerable inflation, there is little prospect of a damaging deflationary 'price-pay' spiral emerging in the UK economy. As such, a modest bout of pay depression against a backdrop of zero RPI inflation is good for jobs since it prevents a rise in real pay costs facing firms without hitting people's real standard of living. 

"However, for the vast majority of workers, accustomed as most of us are to an annual boost to our pay packets, a pay freeze or pay cut will feel like a hardship, especially while the CPI measure of inflation continues to rise which shows that not all the prices people face are in retreat. And with job insecurity on the increase too, the combined effect of zero RPI inflation, rising CPI inflation, and recession is soon going to make it seem as though we are living through a depression."

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onrec
25th March 2009