ONS labour market figures - the calm before the storm

Laith Khalaf
12 April 2022

Laith Khalaf, head of investment analysis at AJ Bell, comments on the latest labour market statistics from the ONS:

“Looking at the latest picture of the labour market in isolation, you could be forgiven for thinking that we were living through a consumer boom. Unemployment is extremely low, a record number of people are in payrolled employment, and regular earnings have risen by a healthy 4% over the last year. The record number of vacancies at almost 1.3 million points to a buoyant economy, and suggests that things are quite simply too good to be true for those in the workforce right now. 

“The reality is that what we are seeing in the labour market is the calm before the inflationary storm. This month price rises are going to move up a notch, and really exert pressure on consumer purses, especially when combined with tax and National Insurance increases. Real regular pay is already running 1% behind inflation, which means declining living standards for working people, and with inflation on the rise, that’s only going to get worse. Particularly when you consider that the freezing of income tax thresholds means less money from pay rises filtering through to consumer pockets.

“It’s hard to know what to wish for on wages. On current trends the shortfall between wages and inflation means workers will be feeling the pinch. On the other hand, if wage growth were to rise significantly from here, that would indicate the inflationary spiral is lifting off, and we could be in for a more prolonged period of price rises. The silver bullet of course would be for inflation to fall away, but that doesn’t look like it’s going to start happening until next year at the earliest.

“Looking at the glass as half full, at least we are approaching the inflationary storm from a position of strength in the labour market, with unemployment being as low as it is. The extremely high number of vacancies is a sign of continued dislocation following the pandemic, and the effects of people deciding to leave the workforce to retrain or retire. Staffing shortages naturally heap pressure on businesses, who are also dealing with rising energy costs and in many cases, higher taxes. Clearly they also face a more constrained consumer as the cost of living crisis starts to bite.

“Economic growth forecasts for this year have been downgraded, but remain relatively robust, seeing as economic activity is still recovering from the pandemic. It’s 2023 which is causing real concern though, as the effects of inflation, tax increases and interest rate hikes conspire to put the brakes on economic growth. Just how slow the economy goes, no one knows, but the risk of stagflation is clearly there, no matter how rosy things look in the labour market right now.”

Laith Khalaf
Head of Investment Analysis

Laith Khalaf started his career in 2001, after studying philosophy at Cambridge University. He’s worked in a variety of roles across pensions and investments, covering both the DIY and the advised sides of the business. In 2007, he began to focus on research and analysis, and has since become a leading industry commentator, as well as a regular contributor to the financial pages of the national press. He’s a frequent guest on TV and radio, and for several years provided daily business bulletins on LBC.

Contact details

Mobile: 07936 963 267
Email: laith.khalaf@ajbell.co.uk

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