For many people reading this, and for many whose businesses depend on healthy household finances, two trends will dominate the outlook in 2017. One is the extent of the rise in inflation, now clearly coming through in the figures. The other is how far the slowdown in the job market, also evident in the data, extends.
Inflation, which disappeared entirely last year, is ending this year on a rising trajectory. It was 1.2% last month — or 1.4% on the new CPIH (consumer prices including housing) measure favoured by official statisticians, or 2.2% for those nostalgia buffs who still follow the old retail prices index.
Most of the rise, and most of the rise yet to come, is a direct reflection of the fall in sterling since the EU referendum, although some of it is explained by the reversal of earlier energy and commodity price drops, and those falls dropping out of the inflation comparison.
Indeed, there are some spectacular increases coming through in costs. Industry’s raw material and fuel costs rose by a hefty 12.9% in the 12 months to November. Not all of that will feed through to final prices but some of it certainly will.
In a year’s time, according to most forecasters, consumer price inflation will be close to 3%, though the Bank of England has suggested that the pound’s recent small recovery may mean a slightly lower inflation profile than it feared last month. But the sweet spot we have been enjoying for a while, in which even modestly rising earnings comfortably outstripped the rise in prices, looks to be coming to an end.
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The question for household budgets, which will also be of intense interest to the Bank, is whether there is an acceleration in pay in response to rising inflation. In the past, when we used to talk about the wage-price spiral, that would have been regarded as a certainty. Now it is not.
One reason for that is the softening of the labour market. The other sweet spot of recent times, a prolonged job market recovery, one of the great achievements of recent years, has been fraying around the edges since the summer. The quality of employment growth, which until then had been dominated by full-time employee jobs, has been deteriorating. Now, according to the latest official figures, that recovery has stalled. Overall employment fell by 6,000 in the August-October period compared with the previous three months.
Plenty of caveats should be applied to these figures. In an economy in which nearly 32m people are employed, 6,000 is tantamount to a rounding error. Employment surveys have tended to show that many companies are adopting a business-as-usual attitude to recruitment, though others point to greater caution.
The details of the job numbers were, however, quite soft. The drop in employment would have been bigger were it not for an unusual increase in public employment. There was a fall of 51,000 in full-time employment, partly offset by a rise in the number of part-timers. Unemployment, which is rising on the claimant count measure, would have shown a big across-the-board rise but for a significant increase in inactivity. Some tens of thousands of people dropped out of the labour market. As it was, the latest published unemployment total, 1.616m, was 12,000 up on the figure published a month ago.
The figures — while confirming that employment remains close to record highs and that unemployment remains low — chime with the view that employers have become more cautious since the summer. Again, this is expected to continue. Forecasters on average expect a rise of about 200,000 in unemployment over the next 12 months.
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This is a miserable, if predictable, way to end the year although none of it, it should be said, is yet catastrophic. If the peak in inflation is indeed just below 3%, this is high compared with the past couple of years but lower than in 2011, when the rate exceeded 5%. Any rise in unemployment is unwelcome but an increase of 200,000 would not be huge by past standards. What it would do is reverse the improving trend of recent years.
Will it keep a lid on pay? Pay has been the dog that has not barked for many years. Every time the job market has tightened, wages have failed to respond. The latest figures have average earnings growth of 2.5%, split between 2.8% in the private sector and 1.4% in the public sector, where pay restrictions imposed by the government continue to operate.
The Bank expects pay growth to pick up slowly to 2.75% in a year’s time and 3.75% in 2018, although its previous predictions of a strengthening in pay growth did not come to fruition. Many economists think there will be no acceleration in pay growth next year. That is also the broad message from pay surveys.
How will households respond to a squeeze on real incomes and a softening labour market? The consumer picture has been a little more mixed in recent months than it sometimes seems. Retail sales have continued to be very strong. Helped by Black Friday — one US import we could happily send back — retail sales volumes rose by 0.2% last month and were a meaty 5.9% up on a year earlier. If you took these figures on their own, you would say retailing has been enjoying a boom of Klondike proportions.
The British Retail Consortium, which represents the sector and produces its own sales data, suggests the picture is rather more subdued and will become even more so during 2017. It is puzzled by what it describes as the “extraordinary” growth in sales the Office for National Statistics finds for smaller retailers.
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Other measures of consumer activity also point to a more restrained picture. Private new car registrations have been falling for a few months. Housing transactions are running below the levels of a year ago, although some of that reflects stamp duty changes.
Consumer demand is not about to fall off a cliff. You write off the British consumer at your peril. Equally, though, growth will slow. Household debt, as noted here recently, has been rising quite strongly but I would be surprised if people tried to borrow their way through the squeeze.
As for the wider economy, consumer spending has been what kept it going in the second half of the year. It will need other strings to its bow in 2017, and some of those have their own challenges.
PS Normally at this time of year I would be preparing the ground for my annual forecasting league table, which is always keenly awaited, not least after this most interesting of years. But this is an unusual year in more ways than one. Next Sunday will be Christmas Day and we will have a digital edition only — which will be well worth reading, of course — and the following Sunday is New Year’s Day, when it is customary to look forward, not back. So the league table will appear, but not until next month, probably on January 8. Having had a preliminary look at the figures, it could be rather interesting.
In the meantime, here is a little quiz to keep you going. Answers by January 5, please, and there will be prizes of signed copies of my book Something Will Turn Up for the winners. So here goes.
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1 George Osborne served as chancellor for six years and two months. Did that make him the longest-serving Conservative chancellor since 1945 and, if it did not, who was?
2 Alan Greenspan, the former chairman of the Federal Reserve, was a musician before he became an economist. What instrument did he play?
3 A British economist was joint winner of this year’s Nobel prize in economic sciences, the Bank of Sweden prize. Who was it?
Finally, as a tie-breaker for those who have time: 2016 was a momentous year — what was its most important lesson as far as the economy was concerned?