How I See It : If You're Happy and You Don't Know It - Scratch Your Head

By Jamieson, Bill | Scotland on Sunday (Edinburgh, Scotland), January 11, 2015 | Go to article overview

How I See It : If You're Happy and You Don't Know It - Scratch Your Head


Jamieson, Bill, Scotland on Sunday (Edinburgh, Scotland)


HERE is news that should cheer us up. The UK economy is set to have its happiest year in over half a century.We know this from a handy little device in the economists' toolbox called the Misery Index. It is the sum of the two most depressing features of modern economies: the inflation rate and the unemployment rate. Plot these two together and we have a rough and ready measure of the health of our economy.On this score, we should be very happy by now. Cheaper fuel pushed the rate of UK inflation to a 12-year low in November. The Consumer Price Index dropped to one per cent last month, from 1.3 per cent in October, while the Retail Prices Index (RPI) inflation also fell to a five-year low of two per cent.The UK unemployment rate is down to six per cent, its lowest level for six years, while in Scotland it is down to 5.6 per cent.As for 2015, we are on course to be positively ecstatic. The CPI inflation rate for December, due out this week, looks set to fall below one per cent. And unemployment is likely to continue falling, albeit at a slower pace than in 2014.This should give us the lowest reading on the Misery Index for decades - back to levels not seen since the late 1960s and early 1970s before the Opec oil price hikes and the onset of double-digit inflation.The Misery Index - often seen as the alter ego of the Feel Good Factor - was first formulated by the economist Arthur Okun. Using long-run statistical data, charts from Oxford Economics show that the UK economy was at its most miserable during the high inflation, low growth period of the mid-1970s and early 1980s.The Misery reading saw a steady decline through the Non- Inflationary Constant Expansion (NICE) period of the 1990s to the mid-2000s. The onset of the financial crisis and subsequent recession saw an upward spike.But since 2011, the index has been steadily falling as inflation and unemployment have steadily declined. The outlook for this year is that CPI inflation should average only 0.4 per cent. The Oxford Economics analysis makes a useful and much overlooked distinction between "good" disinflation,driven by falling oil and petrol prices, and "bad" disinflation resulting from depressed demand and high unemployment. Much of the commentary in recent days about the onset of deflation has assumed that it is always and everywhere a uniform phenomenon - no different from Japan - and has tended to overlook the different contexts and dynamics behind the disinflation experience.But the circumstances in the UK and Europe today are quite different to those that have bedevilled Japan.What we know is that on current trends, inflation should continue to be very subdued this year. As for unemployment, Oxford Economics forecasts that robust GDP growth should push the UK unemployment rate down to 5.2 per cent by the end of 2015.The two combined should make 2015 "a thoroughly un- miserable year".As for business, the latest British Chambers of Commerce (BCC) quarterly survey, the largest in the UK, suggests the economy will continue to grow strongly. …

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