The Misery Index is set to make a comeback
By
Associate Editor
David Stevenson
Aug 21, 2008
The outlook is bleak
The Misery Index is set to make a comeback in Britain.
It's a fair bet that only those of you who remember the 1990s recession will have much idea of what I'm talking about, because that was the last time anyone spent any time discussing it.
So what is it? Well, as well as being the name of a Baltimore 'deathgrind' band (don't ask me, that's just what Google says) the Misery Index is a very simple economic indicator. It's a financial pain barometer, measured by adding the rate of inflation to the unemployment level.
Hardly super-scientific. Yet when the Misery Index goes up, we all feel it hurting. And in Britain right now, with consumer prices rising at 4.4% year-on-year and unemployment up to 5.4%, the index has just hit 9.8, its highest point for almost 12 years…
Why the Misery Index is making a comeback
The Misery Index was created by American economist Arthur Okun. It was frequently quoted by the Democratic candidate Jimmy Carter during the 1976 US presidential election campaign. At the time, the index in the States stood at over 13.5. Carter rather piously claimed that no one responsible for imposing that degree of misery on the country had a right even to stand for president.
The peanut farmer duly won that election, but his comments rebounded on him four years later when he tried to get re-elected. By then, the index had soared to a staggering 22, and Carter was roundly trounced by Ronald Reagan.
Yet, if the American populace was feeling gloomy, at least they had the consolation of not being British. In the summer of 1974, the UK Misery Index climbed well into the 30s, as annual inflation – in those days measured by the Retail Price Index (RPI) not the Consumer Price index (CPI) as today - topped 26% and the country was hit by the three-day week. Then after a respite to a low of 13 by mid-1978, the index took off again after the Winter of Discontent, reaching 26 in the early months of Margaret Thatcher's reign.
The rest is history. Monetarism – control of the amount of money in the system – came in, and inflation went out. And the Misery Index plunged to just six or so until 2004, and was still only just over seven a year ago. Bank of England governor Mervyn King has coined this the NICE – Non-Inflationary Consistent Expansion – decade. But now misery is making a come back.
On the prices side, the Bank warned in this month's inflation report that CPI inflation is heading for 5%. But the sages of Threedneedle Street reckon it should then drop back sharply. Yet that's not a view shared by most of the British people, according to Barclays Capital. The bank's survey, released this week, indicated that expectations for future inflation have now climbed to their highest in 16 years, and that UK consumers expect inflation to still be 4.8% in two years' time. What's more, just 13% of respondents expect the CPI rate to be at, or below, 3% within two years.
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Not much sign of an improvement in the index here, then. But it's on the unemployment front that everything could get really nasty. The other side of that Bank report was that we should expect "broadly flat output" in the UK. Yet as Capital Economics pointed out this week, it doesn't work like that. The recession "tipping point" is at hand, because "economies don't stagnate – they either bounce back or contract outright". And the latter outcome is the clear favourite.
The unemployment rate could double during this recession
The net result is that UK unemployment could rocket. It's already started rising, and the British Chamber of Commerce forecast this week that the total could top 2m within the next few years, which would lift the headline rate to 6.5%.
But Capital Economics points out that for the last five post-WWII recessions, between the start of each and a year after each finished, unemployment actually rose by an average of 700,000. And in both of the past two recessions, unemployment surged by no less than 1.3m. If something similar were to happen this time round, the headline rate would jump to more than 10%, from 5.4% now. On the back of those inflation expectations, that would hike the Misery Index back up a frightening 14-15, last seen in the middle of the early 1990s recession.
Clearly the jury is still out as to how bad things will actually get, but with CPI inflation almost as high as the 5% base rate, the Bank of England can't help out by cutting loan costs. Nor can the government 'spend' the country out of recession, as "public finances are clearly very stressed", says Investec economist David Page. Ross Walker at Royal Bank of Scotland agrees. In fact, he says, "the deterioration in [government] revenue streams is likely to become increasingly acute as the year progresses".
There's no doubt there's much more misery on the way for the UK.
And if you think that's grim, there's always the Despondency Index. This - rather bizarrely - correlates, apparently in real time, the suicide rate as measured by the Suicide Box at the Golden Gate Bridge in San Francisco with the Dow Jones Industrial Average. Let's hope that things don't get so bad that I end up writing more about that…
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