Is the gig up for western inflation?

Anthony Gillham explains how changes in the way we work are now so ingrained that they're helping to keep inflation at bay, perpetuating today's 'wageless' recovery.

Although they probably don't know it, this new generation of reconditioned shop workers are part of what's known as the 'gig economy'. It's been the unrestrained growth of the gig economy that has loosened up the labour market over the last decade enabling employers to keep their wage bills under tight control.

If you've wandered into a DIY store, a major supermarket car park or even your local pub in recent times then you'll no doubt have noticed the rising tide of silver haired employees shuffling around in the foreground. This is one of the consequences of a population that's suddenly living much longer and healthier lives than it did just a generation ago. The aisles of white

Whether it's by choice or just hard necessity, millions of Britons are now donning aprons and returning to the workforce for a second innings. This influx of willing, skilled and only partially worn-out employees is one of the clearest indicators of the new forces that are helping to keep inflation at bay.

Although they probably don't know it, this new generation of reconditioned shop workers are part of what's known as the 'gig economy'. It's been the unrestrained growth of the gig economy that has loosened up the labour market over the last decade enabling employers to keep their wage bills under tight control. These days, there's no end of jobs that can be done by employees on so-called 'zero-hour' contracts (which don't commit the employer to offering stable hours or benefits) and there are already well over a million Britons who currently work via online platforms such as Uber, Deliveroo and others1.

Taking the gig

More tellingly, there are now about 50% more self-employed people in the UK than there were at the start of the century with over a million Britons reportedly taking the plunge in the 10 years since the financial crisis. Great swathes of these are experienced professionals who have taken advantage of modern technology to offer freelance or consultative services in their chosen field.

It's currently estimated that at least 16% of UK workers now work in the gig economy. But while it's delivered a new degree of flexibility to the labour market, it's also helped to cut the legs out from under UK wages and, by extension, UK inflation.

There are now about 50% more self-employed people in the UK than there were at the start of the century with over a million Britons reportedly taking the plunge in the 10 years since the financial crisis.

Waging war

Historically, wage increases have always been a key driver of inflation. However, in both the US and the UK, wage increases have been stalled for the better part of a decade. In fact, US wages actually peaked back in 2015 with recent US average hourly earnings data (the so-called 'non-farm payrolls') failing to hit expectations.

Meanwhile, there's increasing evidence to show that employers in the states are looking more closely at the non-salaried part of the package they offer such as help with accommodation or reduced working hours. Others are resorting to recruiting students or banks of distance workers to address key skills shortages that are emerging in the US.

The picture is little different over here. Skill shortages are emerging as we head ever closer to full employment – especially in those areas where the differential between average salaries and average property prices is greatest. The situation is such that the Bank of England recently advocated the need for more migrant workers to help address the problem.

Thanks to the gig economy, a growing proportion of the UK workforce is unable to work as many hours as they might like, or for the salary they think they deserve, but are structurally incapable of negotiating improved wages. This helps to explain today's 'wageless' recovery.

The gig is up

The gig economy then, when coupled with the continued rise of new technologies such as robotics and artificial intelligence, has helped to keep inflation at bay – despite all the growth indicators that suggest it should be higher at this point in the cycle.

The quant model that we use to forecast core CPI is among those that probably needs to be recalibrated to take account of factors such as the gig economy and the new wave of automation (referred to as 'industry 4.0') that's currently revolutionising manufacturing. Like many models of its type, it looks at the level of sterling and the cost of commodities as key drivers of inflation. But sterling remains weak, which historically has meant that we end up 'importing' a degree of inflation, while commodity prices – most notably oil – have begun to tick up once more.

Left to its own devices, this model would suggest that core inflation (not even the full rate of inflation) could well hit 3% before it fades back. The fact that we don't expect core CPI to go anywhere near this level in the coming months shows just how much impact the gig economy is having on labour markets and inflation.

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  1. Source: Fullfacts

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