The big question facing the Bank of England is whether the recent high inflation numbers will be transmitted through the labour market in a vicious inflationary circle. According to the official figures, wage inflation has so far been restrained. However, should one always believe the official statistics?
An article in today’s Financial Times entitled ‘Fears for quality as statisticians scatter’, touches on the subject of the quality of data that economic policy decisions are made on. The thrust of the article relates to the problems faced by the Office for National Statistics (ONS), as it relocates from London to Wales. The interesting chart for us bond vigilantes is the one showing the “official” average earnings index and the experimental weekly earnings measure. The chart shows wage inflation to be significantly higher on the new experimental measure than on the traditional average earnings index.
Going back further in time, figure 3 of this ONS report, shows that this is not purely a natural bias but could well better reflect the state of the labour market, with the experimental measure turning down below the headline measure in 2002 as the economy weakened. As the FT points out, it may well be that wage inflation from 2005 to the present has been running at nearly 2% per annum higher than the Bank of England has been told. No wonder then that today’s Distributive Trades Survey (subscription required), showed pricing pressure at eight year highs, and the Bank has failed to keep inflation within its target range. After all, if the statistics you base your decisions on are wrong, then the odds of hitting your target goals are reduced.
For anyone wondering what an experimental statistic is, the ONS describes them as “statistics that are in the testing phase and are not fully developed”. And for those of you wondering how the ONS determines when a statistic is no longer experimental, well this “is largely a matter of statistical judgement…….”. Quite!