The Misery Index

Since Economics is the ‘Dismal Science‘ it may come as no surprise some economists have developed a term known as the misery index.

The misery index is simply the sum of inflation plus unemployment rate. The higher the combined score, the worse the economic situation.

In the UK, at the moment the misery index is relatively low. Unemployment (claimant count) is 3.4%. CPI inflation 2.2%. This gives a combined misery index of 5.6%. Back in the 1980s the misery index was much higher. In 1981, we had unemployment of about 10% and inflation of about 4%, giving a misery index of 14%. At the height of the Lawson boom, inflation reached 11%, with unemployment still persistently high at around 6%.

A lower misery index requires a reduction in both inflation and unemployment. This can only be achieved by supply side improvements which help increase productivity and reduce both structural unemployment and structural inflation.

The Phillips curve suggests there is a trade off between inflation and unemployment, but this trade off can change. E.g rising oil prices could cause cost push inflation, which shift AS to the left causing both inflation and unemployment. This is known as stagflation.

The misery Index for UK in 2008.

Many predict the UK misery index will rise in 2008, because of slightly higher cost push inflation and rising unemployment as the economy slows down. But, it is still much better than previous decades

Limitations of Misery Index

Arguably UK unemployment is underestimated.

Deflation is worse than inflation. Therefore, inflation of 0% may suggest a stagnant economy like Japan in the 1990s