Cheap petrol, falling food prices… What’s not to like? Quite a lot, actually

http://www.theguardian.com/business/2015/mar/22/inflation-pay-living-standards

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Plunging global oil prices, and the resultant drop in inflation, have so far been experienced by British consumers as an unambiguous plus. Petrol is cheaper at the pump; food prices are falling; and real wages are finally on the rise.

Official figures to be released on Tuesday will reveal whether inflation fell even further in February from January’s 0.3%. If so, the news is likely to be cheered by George Osborne as another of the economic “milestones” he has taken great pleasure in marking over recent weeks.

But a thoughtful – and troubling – speech last week from the Bank of England’s chief economist, Andy Haldane,​ suggested we should think twice about welcoming a fresh drop in inflation too enthusiastically.

In his final budget before the general election, the chancellor last week highlighted the Office for Budget Responsibility’s forecasts suggesting that living standards will be higher by the end of this year than when the coalition came to power in 2010.

Today’s labour market doesn’t follow the old-fashioned recipe in which falling unemployment feeds through to inflation

Such an increase would be partly thanks to low inflation, but it also depends on the OBR’s expectation that wages will rise at a healthy clip throughout this year – something the Bank’s monetary policy committee is also relying on to bring inflation back towards its target of 2%.

In Haldane’s view, that may not happen any time soon. Month after month, quarter after quarter, since the immediate financial crisis came to an end, the MPC’s forecasts have shown productivity recovering, wages picking up, and inflation bouncing back. That’s what is meant to happen during a recovery, as unemployment falls.

Yet as Haldane points out, there may be far more slack in today’s labour market than the majority view on the MPC would have us believe. Plenty of part-time workers might be willing to do more hours, for example; a growing number of over-60s are looking for work to supplement paltry pensions; and migration from lower-wage countries may pick up as the economic outlook improves.

In other words, today’s labour market just doesn’t follow the old-fashioned recipe in which falling unemployment rapidly feeds through, via wages, to inflation.

Stir in weak global demand – one of the factors explaining low inflation, Haldane suggests – and a strengthening pound, which tends to bear down on prices in the short term, and we could be looking at a more prolonged period of low inflation than the MPC has acknowledged. And if that view becomes widely shared, it could feed back into wage-setting, creating the kind of deflationary spiral that alarms economists, because it can be very difficult for policymakers to break – particularly with interest rates already close to zero.

The ever-optimistic MPC is expecting wage growth of 3.5% in 2015. Haldane’s analysis suggests that target is likely to be missed. His view is glaringly different from that of his boss, Mark Carney, who recently suggested it would be “foolish” to react to a drop in inflation that he insisted resulted from a one-off shock to global oil prices.

And who wins this particular intellectual spat matters not just for bragging rights in the Bank canteen, but for whether, and when, workers up and down Britain will finally feel they are reaping the benefits of recovery. Without the sustained improvement in living standards many forecasters are still banking on, the upturn itself may prove short-lived, as growth in consumer demand fizzles out.

It would have seemed inconceivable even a few months ago, but interest rates may yet have to fall further, before they go up. And as Haldane pointed out, it wouldn’t be the first time economists’ expectations have been confounded. When rates were first cut to 0.5%, in March 2009, financial markets expected them to remain at that level for just nine months.

Games of phones could cost consumers

Sky picked a good day to bury the bad news of an early price rise for its pay-TV services. The announcement came on Wednesday, just as George Osborne was presenting his pre-election budget to the nation. For Sky’s 11m customers, the costs are going up from June: subscribers will pay an extra £1 a month for the sports bundle – having absorbed a £2.50 rise last September. The variety pack will cost £2 more, and the family bundle £3 extra.

With a gargantuan bill to pay for three new seasons of English Premier League football, Sky is digging behind the sofa cushions for all the loose change it can find. Analysts at Liberum say net new revenue from the price increases will be £240m a year, and every little helps when the Premier League will be costing more than £625m more per season from 2016.

With the new season of Game of Thrones beginning in April, Sky customers will be reluctant to seek a better deal elsewhere. An added comfort for the Murdoch-owned satellite broadcaster is that prices are expected to rise across the fast-converging TV, broadband and mobile market.

Two mega-mergers are on the menu: BT is buying mobile network EE, and Hong Kong’s Hutchison Whampoa has snapped up O2 to combine it with its existing Three network. Consumer groups are warning that fewer competitors could mean the UK loses its position as one of the best-value places in Europe to get online or make a call.

The surest sign that consolidation will lead to what analysts euphemistically call “market repair” is the 30% increase in BT’s share price since its EE deal was announced in February. Investors are salivating.

Unfortunately, sports channels are one area where more competition has yet to benefit consumers. Quite the opposite, in fact. BT’s turf war with Sky is good news for players and agents, but the cost of following top-flight football on TV is rising nearly as fast as property prices in areas popular with its players.

Spanish banking challenge

So another Spanish bank has swept on to the UK high street. Not Santander’s closest rival at home, BBVA, but Banco Sabadell, the Catalan bank that has agreed a £1.7bn takeover of stock market minnow TSB.

Josep “Pepe” Oliu, the boss of Sabadell, admitted he had taken his lead from his larger Spanish rival after watching the success of Santander, which over the past 15 years or so has hoovered up Abbey National, Alliance & Leicester and Bradford & Bingley.

Sabadell has great plans to turn TSB into a proper challenger and, potentially, to buy up bits of banks being sold off by the government. But as Santander has found, it will need patience and persistence. Even after all this time, Santander’s market share is still small in the UK and it does no more than nip at the heels of the big four of Lloyds Banking Group, Royal Bank of Scotland, HSBC and Barclays.

The challenge for Sabadell will be even bigger.