Today’s inflation figures show a welcome easing of price pressures. CPI fell to 1.7% in the year to February from 1.9% in January with the largest contribution to the fall coming from motor fuels. RPI fell to 2.7% from 2.8%, CPIH which is consumer price inflation that includes owner occupiers’ housing costs fell to 1.6% from 1.8% and RPIJ which is an updated version of RPI fell to 2.0% from 2.1%.
Monthly updates in inflation can hardly be regarded as showing the success or failure of an economic strategy but the trend over the last year has certainly been for lower inflation. Both the Bank of England and the OBR expect more sanguine inflation over the coming months and despite their significant underestimation of inflation over the last few years, it seems likely that in the absence of supply side shocks, prices will remain relatively stable. As far as wages are concerned, a tightening of the labour market will probably feed into a short term boost in nominal wages and this should lead to real wage growth. In estimating labour market slackness, the OBR in the latest Economic and Fiscal Outlook looked at recruitment difficulties, vacancies per unemployed and vacancies versus availability. All three measures show much tighter labour market conditions in 2013.
Of course, we know that long term real wage growth depends on sustainable productivity growth but at least by the election most workers are likely to be receiving decent nominal wage rises. Furthermore, more of the deficit will have been eliminated, growth is likely to be robust and employment will almost certainly continue to rise. So how does Labour intend to fight an election on the cost of living in 2015 based on figures from 2013? The party’s rhetoric and focus is at risk of becoming irrelevant as economic fundamentals continue to improve.
The same is true of its policies. The Labour press release this morning after the inflation figures came out says that the party “will freeze energy bills until 2017, make work pay by expanding free childcare for working parents and get at least 200,000 homes built a year by 2020. We also want to introduce a lower 10p starting rate of tax to help 24 million people on middle and lower incomes.”
In the meantime, consumers are working together to harness the power of markets to cut energy bills through initiatives such as The Big Deal, the carbon price floor has been frozen and green levies have been cut. The governing parties are busy competing over who can take the most people entirely out of income tax, new garden cities are being built and a savings revolution has just been launched. Much work remains to be done but Labour will be left behind if wants to fight the 2015 election based on an idea it had in 2013.