Meanwhile, In The UK…

Headlines out of the UK continue to paint a bleak picture of stagflation and generalized economic malaise.

The counter-narrative crowd insists on a cartoonishly ridiculous, deliberately obtuse version of events that exonerates Liz Truss and absolves Brexit. For such people, being on the wrong side of every debate is a point of pride.

The UK’s economic crisis worsened dramatically during Truss’s six-week stint as prime minister (she nearly stumbled into an outright financial meltdown), notwithstanding the energy price guarantee, which some lawmakers now argue risks exacerbating labor shortages by conveying to the public that it’s “not worth taking on an extra hour of work,” to quote conservative MP Harriett Baldwin who, prior to politics, managed pensions at JPMorgan.

As for Brexit: All these years after a plebiscite where a poorly-informed public voted to leave something many couldn’t even define (the EU), the bill is coming due. According to BoE chief economist Huw Pill, Brexit is having “some effect” on inflation through a variety of channels. His argument is hardly controversial, particularly when paired with the caveat that Brexit obviously “isn’t the whole story,” as he put it late last month. In a November radio interview, the above-mentioned Baldwin said “there is a Brexit effect [but] it’s further down the scale of impact” behind the pandemic and the war in Ukraine. Nobody would argue otherwise. The point isn’t to downplay the virus or the war, it’s just to say that bad political decisions do have consequences, and can make things worse when exogenous shocks come calling.

Inflation receded in the UK last month, according to data released on Wednesday, a day ahead of the BoE’s last policy decision of 2022. At 10.7%, headline CPI printed below estimates. Economists expected 10.9%. I’m not sure the figure (below) inspires much confidence, but at this point, any news that isn’t overtly bad is overtly good.

The prior month’s 11.1% reading was the highest 12-month CPI rate in the modern history of the National Statistic series, which began in January 1997. An indicative measure suggests it would’ve been slightly higher (11.2%) in 1981. The annual rate of inflation for food and non-alcoholic beverages rose a 16th straight month, to 16.5% in November, the highest since 1977.

Wednesday’s data came with the usual apology from the Chancellor. “I know families and businesses are struggling here in the UK,” Jeremy Hunt said. “Getting inflation down so people’s wages go further is my top priority.”

It’s a nice sentiment, but it makes for a rather stark juxtaposition with the government’s refusal to grant public sector workers raises that ensure their pay keeps up with inflation. Rail strikes and walkouts staged by nurses and other key workers, including ambulance staff and postal employees, threaten to further derail (pardon the bad joke) the already struggling economy. Between the walkouts and bad weather, London is a “ghost town.”

The graphic (above) from the BBC is helpful. Note that although public support for the strikes varies by occupation, I wouldn’t call it “low” in an absolute sense for anyone. Polling suggests roughly 50% support rail workers, for example, and more than 60% support nurses.

Of course, there’s an argument to be made that ratcheting pay higher to match double-digit inflation would make things worse, underscoring the intractable nature of the chicken-egg dilemma that sets in once inflation becomes any semblance of entrenched. Concessions to workers could compel the BoE to factor in higher wage assumptions, thereby skewing decisions in a hawkish direction, albeit on a policy committee that’s now hopelessly divided.

Data released on Tuesday showed the gap between public and private sector pay growth remained very wide (figure below).

I’ve flagged that dynamic on any number of occasions in 2022, most recently on October 11. The 6.9% growth rate for the private sector is the swiftest ever outside of the pandemic period (albeit still nowhere near the annual rate of inflation), and the disparity with public sector pay growth is simply huge.

Paul Hollingsworth, BNP’s chief European economist, told CNBC (and this is a rare case when a CNBC article was worth reading) that the key question is whether demands for higher pay from the public sector are a “one-off catch-up [or] the beginning of a more sustainable or more structural shift in worker bargaining power, and the bargaining power of unions.” That question, among others, sits at the center of the macro universe headed into 2023.

Rishi Sunak on Tuesday said the strikes could make “an enormous negative difference to people’s lives” at Christmas. Last week, he claimed that meeting public sector pay demands would hurt “ordinary families.” “What I’m not going to do is ask ordinary families up and down the country to pay an extra £1,000 a year to meet the pay demands of the union bosses,” he declared. “That wouldn’t be right and it wouldn’t be fair.”