Falling Inflation, Tight Labour Market, and Recessions


Falling Inflation, Tight Labour Market, and Recessions

Johnny Runge, Elizabeth da Silva Gomes, Mike Hughes

Falling inflation, tight labour market, and recessions – how (not) to communicate economic statistics to the public  

In February 2020, just before the pandemic, we ran an online YouGov survey on the public understanding of economic statistics. We found that large parts of the UK public have misperceptions about economic figures and the economy in general, especially in relation to the national economy and concepts such as GDP. In contrast, the public had a better understanding of concepts relating to their personal finances, for instance how interest rates affect their savings and borrowing. 

Two and a half years later, in August 2022, we ran a second YouGov survey where we repeated many of the questions from the original study and added some new ones. Our aim was to explore whether there have been any changes in public understanding over this period, especially in the context of dramatic changes to the UK economy due to the pandemic and the cost-of-living crisis.  

Our study, conducted by researchers from the National Institute of Economic and Social Research, as part of the research programme of the Economic Statistics Centre of Excellence and funded by the Office for National Statistics, was published today.  

Overall, the findings suggest a mixed picture. In some areas, the public have a strong understanding of current developments. On inflation, unsurprisingly, by far the most people in the UK (85%) are aware that inflation has increased, and that the current inflation rate is considered high (84%), though many feel it seems even higher than official figures suggest (59%). At the same time, the UK public have become more confident about their understanding of inflation since the previous survey, likely related to the rises in the cost of living and the impact this has had on people’s finances. 

However, our findings point to an important lesson for economists, statisticians and journalists about how to communicate “falling inflation” in the coming months and years. There is often confusion between price levels, changes in prices (the inflation rate) and changes in the inflation rate. The survey tested the public comprehension of a headline stating, “the inflation rate has fallen from 10.1% to 6.1%”. Only half (50%) of the UK public understood that this meant that prices are still rising, just not as quickly as before. Worryingly, more than a third (36%) thought it meant prices had fallen, which could fuel distrust.  

It is worth noting that this headline is very similar to previous reporting in UK media, as outlined in our report. Going forward, as the inflation rate hopefully starts heading closer to the Bank of England 2% target, it will be important for economists, policymakers and the media to remember that this does not bring back normality for the UK public, when it comes on the back of several years of living through a cost-of-living crisis, and if they have not received equivalent pay rises. 

Similar to our original study, our results suggest that the UK public find labour market statistics confusing. For instance, while the steady rise in “economic inactivity” has been one of the defining features of the UK labour market since the last survey, the term is still not widely understood by the public. Most people (85%) said they were not aware of the term or had a weak understanding, and less than a quarter (22%) were able to identify the correct definition from a list of options. As part of previous ESCoE studies, we have experimented with other ways of presenting labour market statistics, and our new survey findings only confirm such experiments are needed.  

In contrast, just over half of people (53%) recognise that there has been an increase in job vacancies in the labour market, another prominent development since the last survey. Economists, and sometimes the media, refer to this as a “tight labour market”, describing the situation when there are a high number of job vacancies, but not a lot of available workers to fill those vacancies. Our findings suggest that it is unwise to use this terminology in communication to the public, as only 36% can identify the correct definition from a list of options. 

There are still less than half of people (44%) who can correctly identify that GDP relates to the size of the economy. Furthermore, this period saw a lot of headlines that we are “heading for a recession” or that we are “narrowly avoiding a recession”. However, only just over half of people (53%) can identify that an “economic recession” usually refers to a fall in the size of the economy. The ONS are often cautious in using the term recession, and the survey findings suggest that journalists should consider following suit, for instance simply referring to “a fall in economic activity” or “a fall in the size of the economy”. Our previous ESCoE research, using focus groups, shows that many people see recessions as negative economic events, and would likely be surprised that the current cost-of-living crisis is not automatically described as such. 

Similar to before the pandemic, the UK public still demonstrates a strong understanding of how interest rates affect personal finances for borrowers and savers, with more than three out of four answering those questions correctly. Furthermore, back in August when the survey was conducted, most people (77%) were aware that interest rates have risen since the start of the pandemic, a number which is likely to be higher today. 

As such, one of the strongest findings of our research is that people often have a strong understanding of economic issues that are closely related to their personal economy, such as interest rates or inflation. You might think this means that the current cost-of-living crisis and Bank of England interest rate hikes are straightforward to communicate to the UK public. However, our previous ESCoE research and other studies also show that people are often not able to link economic concepts together, and find it hard to understand the complex causal mechanisms in the economy.  

For economists, interest rates and inflation are intrinsically linked. In contrast, the UK public do not necessarily understand whether and how they are connected, or what the purpose of monetary policy is. It is important that economists, journalists and policymakers take care to explain these connections in the current economic climate, rather than having a false sense of confidence in people’s grasp of monetary policy.   

Our report concludes with a chapter that provides a roadmap for communicating labour market statistics to the public, with reflections on the challenges in communicating labour market statistics, and some of the potential solutions.

ESCoE blogs are published to further debate.  Any views expressed are solely those of the author(s) and so cannot be taken to represent those of the ESCoE, its partner institutions or the Office for National Statistics.

About the authors

Eliza da Silva Gomes

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