UK economic data — not your standard AD story

Richard Williamson, a loyal MR reader, writes to me:

I think there has been a lot missing from the discussion of the UK in the blogosphere. We are a bit of a puzzle on a purely AD-based explanation of the recession.

1) We didn’t have deflation (on annual basis at least), and even stripping out the effect of the VAT rise in 2011 should still show persistent inflation over 3% since 2010
http://www.tradingeconomics.com/united-kingdom/inflation-cpi

2) UK inflation expectations seem to be significantly higher here (if falling away a little recently)
http://www.bondvigilantes.com/2012/03/19/markets-start-to-think-about-inflation-again/
http://uk.finance.yahoo.com/news/uk-inflation-expectations-drop-1-093038319.html

3) If you look at table EMP02 here, you can see that the public sector as share of total employment the same in the UK today as in Q1 08, and almost all the decline in *total* employment has been in the private sector (the increase in public sector employment in Q4 08 was due to bank nationalisations)
http://www.ons.gov.uk/ons/rel/lms/labour-market-statistics/april-2012/index-of-data-tables.html#tab-Employment-tables

I’m not really sure what is going on. But based on my twitter feed today, a lot of other people seem to be. If we were to just look at inflation (at expectations thereof), the country that ought to be having an AD-driven double-dip recession would appear to be the US.

Richard writes again to me:

I would also like to add that any demand issue we have would not appear to be due to ‘austerity’, but rather that we are explicitly targeting inflation in the context of some (as-yet unspecified) supply side problems…

Ps I also think there’s a weird thing about the ‘confidence fairy’ rationale for austerity, where we might expect a government that believes this to tactically *exaggerate* the amount of actual cutting they’re doing, a reversal of usual government incentives.