This week always feels like a bit of a transition every year – it starts to feel a bit late to say “Happy New Year”, and the start of the week is dubbed “Blue Monday” as people realise that those well-meaning new year resolutions have already been broken.
One of mine was to think hard to find the optimistic news in what can sometimes feel like the unrelentingly negative economic situation we are in, which is likely to remain tricky throughout the year. I was tested hard this week as new inflation data was released on Wednesday.
Inflation falls to 10.5% – but let’s not get too excited
The ONS released the official inflation data for December, which showed CPI inflation had fallen from 10.7% in November to 10.5% in December.
The main items driving the fall in inflation are petrol and diesel prices, and prices for clothing in footwear. Prices at the pump have been falling since their peak in July, and in December they were back to roughly the levels they were at before the Russian invasion of Ukraine. Clothing and footwear has fallen really due to a lack of discounting in December 2021, so when compared to December 2022 it appears that prices have fallen.
Obviously, energy prices are still contributing hugely to this very high inflation rate (which, let’s not forget represents a 40 year high of inflation apart from the preceding three months in 2022). That increase is currently stable in the figures due to the UK Government’s Energy Price Guarantee – but this cap on unit prices is only in place until end March, when it increases to £3,000 for a household with typical use. The ONS estimate that this will add 1 percentage point to inflation when it comes into effect.
Worryingly for those on the lowest incomes, food prices continue to increase faster than the headline rate. The inflation rate for food and non-alcoholic beverages increased to 16.9% in December from 16.5% in November.
We were asked two main questions when the data came out on Wednesday.
The first was, of course – what is the outlook for inflation for the rest of 2023? The expectation by the OBR is that inflation is likely to fall to under 4% by the end of the year. But remember, this does not mean that prices will start to fall at this point – just that they will grow less quickly.
This is somewhat simply due to the definition of inflation – it compares prices now to prices a year earlier, so as we move into October, we will be comparing to the much higher energy costs from October 2022. It was therefore inevitable that growth was likely to slow down – a point to bear in mind when some try to take credit for the fall in inflation.
The second is whether we are likely to see further increases in the Bank of England’s base rate at their next meeting on 2nd February – especially given that inflation has come down a bit. Unfortunately for mortgage payers, it is still very likely that we will see further increases in the base rate.
Why? Because inflation is not just been driven by food and energy costs. CPI excluding energy, food, alcohol and tobacco (often referred to as core CPI) is at 6.3%, and has been around this level since July 2022. This is being generated by domestic factors, including the tight labour market, which means the Bank is likely to take the view that they need to continue to cool demand in the economy.
Scottish unemployment remains at 3.3%
We also got updated figures on the labour market on Tuesday, covering the three months to November. Scottish unemployment remained at 3.3%, slightly below the UK rate of 3.7%. Employment remains high, at 76.1%, with inactivity at 21.3%.
Changes in inactivity over the period of the pandemic have been a focus of much analysis – because although the level is now similar to before the pandemic, the underlying reasons why people are inactive seem to have changed – with an increasing number saying that they are not in work or seeking work because of ill health or disability.
See a great Twitter thread on this by our colleague Professor Stuart Mcintyre – as part of his monthly analysis of the labour market.
The vacancy level alongside the labour market data helps us understand how tight the labour market continues to be. The total number of vacancies has been falling in recent months, since the record highs in Q2 2022. However, the number of vacancies remains historically very high, with 1.0 unemployed people for each vacancy – a rate which remains indicative of a tight labour market.
Earnings (ex bonuses) grew by 6.4% in the year to the three-month period Sept-Nov. Given the inflation rate over this period, this means that earnings are continuing to fall in real terms. In the face of continuing public sector pay disputes across the UK, the split between the public and private sectors is particularly interesting. Private sector pay grew by 7.2% compared to 3.3% for the public sector.
Health Foundation publishes important research into health and health inequalities in Scotland
This week the Health Foundation published a report to provide a picture of health and health inequalities in Scotland, in order to inform future efforts to improve both.
An independent review underpins their report, and we were delighted to work with the Health Foundation on this programme of work, as one of four independent organisations to carry out supporting research. See our research here.
And finally, I don’t care if it’s too late – Happy New Year everyone! But that is the last time I’ll say it this year.
Mairi is the Director of the Fraser of Allander Institute. Previously, she was the Deputy Chief Executive of the Scottish Fiscal Commission and the Head of National Accounts at the Scottish Government and has over a decade of experience working in different areas of statistics and analysis.