Analysis of Labour Costs and Profits Impacting UK Inflation: 2010-2023

A recent report by the Office for National Statistics (ONS) delves into the intricate relationship between labour costs, profits, and domestic inflation in the United Kingdom from 2010 to 2023.

Key Findings:

  1. Domestic Inflation Surge: In the year leading to Quarter 2 (Apr to June) 2023, domestic inflation increased by 7.9%. Notably, higher unit labour costs contributed around two-fifths (3.3 percentage points), and increased unit profits contributed about one-fifth (1.6 percentage points) to this surge.
  2. Relative Contributions Over Time: Contrary to recent quarters, the report highlights that there hasn’t been a clear increase in the relative contributions of unit labour costs and unit profits. The 1970s saw higher contributions from unit labour costs to domestic inflation, particularly following oil price shocks.
  3. G7 Comparison: The report indicates no significant change in the labour and capital income shares in recent quarters for the G7 economies. Contributions to domestic inflation don’t necessarily imply high inflation due to increased labour costs or profits. Changes in income might reflect responses to higher inflation, especially in the case of external shocks.

Background and Context:

  1. Drivers of Inflation: The initial pickup in UK inflation was driven by increased energy and commodity prices, reflecting a decline in the country’s terms of trade. Higher import prices led to higher consumer prices.
  2. Labour and Capital Income Response: Changes in the wage- and price-setting process, coupled with a response to higher inflation, might lead to higher labour costs and profit margins. The report explores whether households and businesses have preserved their real purchasing power in response to these changes.
  3. International Comparison: The report compares the UK’s experience with other advanced economies, particularly focusing on the evolution of labour and capital income.