Zach Wilcox discusses the significance of falling inflation.
More good news came through the presses this week. After last week’s reports that unemployment has fallen by 0.2 percent since the beginning of the year, we now know that inflation is falling as well. With the CPI now at 3 percent on the last 12 months, the costs of many goods is not growing as quickly as we’ve recently experienced.
Cities Outlook 2012 showed how high inflation and slow wage growth are making us feel the pinch. This week, that trend continues with total wages falling to 0.6 percent growth from last year, and they grew just 0.3 percent for the private sector. With 3 percent inflation, the average private sector worker saw the price of goods grow 10 times more than their wages.
What does this mean exactly? Think about it this way:
Say your take home pay was £1500 per month last year, and you spent £1200 of it each month. The increase in wages is modest; £4.50 is enough for a pint and a bag of crisps. But, taking into account inflation, you actually end up with £31 fewer pounds a month in order to maintain the same quality of life—sans the extra pub grub.
Effects of wage increase and inflation for an average private sector worker
The recent Daily Mail report showed the relative costs of living in the North and Southof England, and it provides insights into how inflation and wage changes affect different parts of the country. The Centre is interested in expanding this research in the future to show how cost of living varies across cities.
So, while the fall in inflation is good news, the current state of affairs leaves the average worker worse off. Economic pressure on businesses, uncertainty around the market and high labour supply may all be keeping wages down. While falling inflation is essential to making us all better off, wider changes in the economy will be necessary
Senior Consultant, City Economics at Arup
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