We offer a distinctive blend of quantitative, historical, and socio-political analysis to explain the global macroeconomy.
The Carl Lewis Effect
While inflation generally outpaces wages for the time being (meaning that real wages are negative), wage growth resembles the famously slow-starting sprinter who would nonetheless continue to gather pace after his rivals began to run out of steam.
Likewise, we expect headline inflation to taper off in the course of 2023. Wage growth will continue to gather pace, with real wages turning positive in the middle quarters of the year.
Britain's New Austerity
Britain faces a wave of strikes that has been likened to the 1979 ‘Winter of Discontent.’ Most industrial action is taking place in the public sector while what isn’t, is effectively quasi-public, like the railway strikes against private companies with government franchises.
The principal issue is compensation, which in real terms has declined for most public-sector workers due to the combined effects of inflation and post-2008 government austerity. In response, the government has taken a hard-line stance, declaring that it cannot afford to meet workers’ demands, and that doing so will worsen inflation.
In this research brief, we suggest that the government’s hard-line stance is likely misguided and based on overly-simplistic economic reasoning.
- Because the labour market in Britain has become bifurcated, with public and private sectors operating largely separately, the government’s restrictive pay policy is unlikely to have much if any disinflationary impact on the labour market in general.
- To the contrary, the declining quality of public services will impose deadweight costs on the economy and further aggravate the slow growth of labour productivity.
- The resultant slow increase in tax revenues amid rising demands on the public sector could end up worsening the government’s long-term fiscal position – although the government is ideologically-committed to not raising taxes, it may have no choice but to do so in the medium term.
The New Global Inflation Regime
Central banks in advanced economies generally expect inflation to fall back down to about 2-3% in the next couple of years. However, the recent track-record of these forecasts has been spotty at best, and economists have increasingly struggled to account for both its persistence and the resilience of job markets even as economies slow.
In this research brief, we posit that this is because their theories of inflation are flawed. Eschewing conventional demand-focused models of inflation, we propose an alternative approach to the topic which factors in labour costs to produce a different set of projections. We project that inflation will remain elevated much longer than expected, and may not settle below 3-4%. At the same time, employment will remain more robust than during similar phases of previous disinflation. The decline in consumption necessary to cool inflation will consequently depend more heavily than in past tightening phases on the reverse wealth effect of falling asset values.