Britain has a productivity problem

First the good news – the fall in living standards may be coming to an end, with wages starting to run ahead of inflation. Now the bad news: it is as much because wages are rising than inflation is falling – which suggests that high inflation is beginning to become embedded in workers’ expectations. Capital Economics is forecasting that next week’s inflation figures will show the Consumer Prices Index (CPI) at 6.8 per cent, down from 7.9 per cent last month. Average earnings figures, it predicts, will simultaneously rise to 7 per cent – up from 6.9 per cent last month and up from 6.1 per cent a year earlier.

This matters because the Bank of England’s strategy for tackling inflation has been based on the premise that the inflationary surge of the past two years is a one-off reaction to the economy’s re-emergence from the pandemic and to the Ukraine war.