Today's labour market figures were not far off expectations, but that may show how low expectations have become. Last spring, we were all marvelling at how quickly unemployment had started to come down.

With several months of flat or rising unemployment, it is fair to say that the excitement has now worn off. But total unemployment, at around 2.5m, is still lower than many expected in 2009. A six per cent decline in national output had most economists expecting a similar-sized fall in employment; the actual fall over the course of the recession was closer to 2 per cent, pin large part because workers have proved so willing to take cuts in pay and hours, either in their existing job or a new one.

I've said all this plenty of times in this blog. I thought it worth repeating today, because the mood around the labour market has swung from surprised optimism, to deepest gloom. True, anyone who announced a jobs market miracle on the back of last year's falls in unemployment has been disappointed. (In truth, most were a lot more cautious than that.) But that doesn't make the doomsday scenarios any more correct.

For all the ups and downs, I'm struck that the unemployment rate in the three months to November was 7.9 per cent. In the same period in 2009 it was 7.8 per cent. That is to say, we are more or less back where we were in the last months of the recession, when most were still expecting the jobless total to continue to rise.

That said, there are three developments under the surface that are worth mentioning - one somewhat encouraging, the others definitely not.

The encouraging fact is that overall employment in the UK has risen by 184,000. The data on private and public sector employment is less timely, but in the year to September 2010, employment in the private sector grew by 184,000, or 0.6 per cent. For part of that year, Britain was still in recession.

Over the same period, public sector employment fell by 77,000. So, last year, at least, the private sector is likely to have created more than enough jobs to offset losses in the public sector.

That doesn't tell us anything about the future, of course. And we do know there were more public sector job losses in the last months of 2010. But bearing in mind that this was only the first year of recovery, and the OBR is forecasting a total loss of employment in the public sector of 330,000 over 4 years, it's not too dispiriting.

More worrying - though perhaps not surprising - are the rise in the number of young people unemployed, and the creep upwards in long-term unemployment.

Of the record 951,000 of 16-24 year olds out of work, around 270,000 are in full-time education (but looking for part-time work). That has sometimes distorted the "headline" changes. But not this time. The rise in unemployment among this group in the three months to November was due to falling numbers in employment or education - and a big rise in the number not in work and not in school. Not many silver linings there.

The rise in long-term joblessness is also striking: during the recession, labour market experts at the Department for Work and Pensions were surprised and pleased to see that the "exit" rate out of unemployment had held up, even as the number losing their jobs was going up. It's difficult to tell for sure, on the basis of the published numbers, but the rise in long-term unemployment suggests that this is less true today. Or at least, there is a growing "hard core" of people who are not finding work.

One third of people on the unemployment rolls have now been there for over a year. The share was a third when the recession began. As John Hawksworth, chief economist at PwC points out, this is still far below the peak of 45%, reached in the early 1990s. But it is worrying all the same. No jobs market miracle there, either.

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The December inflation numbers are at the high end of expectations - with the target measure of inflation, the CPI (Consumer Prices Index), rising by 3.7% compared to December 2009. But energy and food prices are responsible for most of the rise - indeed, the 1.6% increase in food prices between November and December is the highest on record.

 

No-one is happy that inflation has remained so far above target, for so long - least of all the Bank of England. With so many households seeing the effect on their shopping bills, you can see why David Cameron would want to signal recently, in an interview with Andrew Marr, that he shares their concern. Indeed, the chances are that the CPI will rise even further in the next few months - maybe reaching 4% by February or March.

However, there is little sign that a majority of the MPC (Monetary Policy Committee) is minded to respond with an early rise in the base rate. They remember that this has happened before, in only 2008, when commodity price rises pushed the CPI up to 5.2%. At that time, above target inflation led to the MPC seriously contemplating an interest rate rise, just weeks before Lehman Brothers collapsed. The Bank of England then had to slam into reverse, with unprecedented cuts in rates.

At least, in 2008, the Bank had room to slash rates to support the economy. Those who say the MPC should keep rates low point out that there isn't that kind of leeway today, if the recovery falters. They also note that inflation itself could pose a risk to the recovery.

Asked to name the single largest threat to growth this year, most would probably say public spending cuts, and the recent rise in VAT. But the recent rise in the price of energy, food and other imported goods - not to mention increases in pension contributions and the like - will probably have a much larger direct impact on the disposable income of the average household than this year's squeeze in public spending.

In predicting moderate growth for the UK in 2011, the OBR (Office for Budget Responsibility) is assuming that consumers will continue to do their part, with little change in Britain's still low personal savings rate. But, in the face of this kind of squeeze, it is surely possible that households will instead seek to cut back, with negative consequences for growth.

If that argument is right, high inflation could actually be deflationary in the medium term, and the MPC should continue to provide the economy with all the support it can get.

But of course, there is another possibility: that the squeeze in incomes will eventually lead people in work to demand - and obtain - higher wages to compensate them for their losses. If that happened, the private sector would not be able to create as many jobs, for a given amount of demand, as the OBR is expecting, meaning that unemployment would stay higher, for longer.

A broad-based rise in wages would also, almost certainly, trigger a response from the MPC. Naturally, the committee that sets Britain's official interest rates will be watching the inflation figures over the next few months. But they will be looking just as closely at what happens to wages.

Update 1240: Most City analysts have taken today's inflation numbers in their stride - many of them urging the MPC not to be "spooked" into raising rates. But Simon Ward from Henderson Global Investors has some interesting points to make for the other side. Here's what he says:

“It has recently become fashionable to quote the tax-adjusted inflation measures, CPI-CT and CPIY, which are running well below headline inflation, at 1.9% and 2.0% respectively (up from 1.5% and 1.6% in November.) CPI-CT is calculated at constant tax rates while CPIY excludes indirect taxes altogether.

“These measures, however, understate "true" inflation because they are calculated on the assumption that indirect tax hikes are passed on in full to consumers. ONS research on the December 2008 VAT reduction from 17.5% to 15% indicated pass-through of only one-third. Assuming that one-half of the increase in VAT and other indirect taxes last year was reflected in the prices charged to consumers, inflation would now be about 2.8% had tax rates remained stable.

“The current inflation overshoot should be viewed in a longer-term context. The consumer prices index for December was 4.4 percentage points above the level implied if the Bank of England had achieved 2% inflation since the target was switched to the CPI in December 2003, implying an average overshoot of 0.6% per annum. The RPIX measure (i.e. retail prices excluding mortgage interest costs) has exceeded the previous 2.5% inflation target by 5.3 percentage points over this period.

"Advocates of a rise in interest rates are not "inflation nutters" but believe that believe that action is required to prevent an upward drift in inflationary expectations that would worsen the output-inflation trade-off, thereby depressing medium-term growth prospects.”

The point is well made. It is simplistic to look at CPIY or CPI-CT and say, just because they are below 2%, there is no reason to worry. After all, those aren’t the measures of inflation that the MPC is legally obliged to target. Nor do they correspond to any common understanding of inflation. When we get to the check-out, we can't ask the cashier to charge us only at "constant tax rates". We have to pay the whole lot.

It's also worth remembering that these, more "benign" measures of prices rose just as much as the target measure in December. CPI at constant tax rates rose by 0.4 percentage points between November and December, from 1.5% to 1.9%; CPIY rose from 1.6% to 2%. That is what you would expect: the rise in VAT in January can only have affected the December figures indirectly. Food and transport prices were doing most of the work.

I don't get the impression that the MPC relies too heavily on either CPIY or CPI-CT in making their judgments. They are a rough indication of what might be going on beneath the surface - nothing more.

Like Mr Henderson, their focus is on what these high inflation figures might mean for future wages and inflation expectations, and ultimately, the long-term potential growth of prices and the economy. But for now, at least, they are drawing a different conclusion.

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We are told that eurozone finance ministers meeting yesterday and today (with other EU ministers) in Brussels are keen to put the crisis in the single currency behind them.

Well, maybe. But you could argue that they shouldn't put it too far behind them. Why? Because across the eurozone, governments are pinning their recovery hopes on a weak euro. And in 2011, most analysts are expecting the euro to go up.

Arguably, the only way to stop the euro from strengthening, in the current global environment, would be for ministers to continue to mismanage the crisis. In other words, to support the real economy, they need to fail to put at least some of the markets' worries to rest.

Naturally, I am being a little facetious. But I have been struck by the number of city forecasters predicting that the euro will go up in 2011. Goldman Sachs, for example, is betting that one euro will be worth $1.50 by the end of this year.

The logic is not so much that Europe is strong - more that the dollar has to fall for the US current account deficit to come down. And of course, monetary policy is also on the side of the euro. Jean-Claude Trichet's remarks last week confirmed that the ECB is a lot closer to raising interest rates this year than the Federal Reserve.

You have to imagine the euro would have strengthened a long time ago, had it not been for Greece, Ireland and the rest. There was a relentless rise in the value of the euro against the dollar in the first years of the single currency, peaking just shy of $1.60 in the summer of 2008.

It fell sharply in the wake of the crisis, only to creep up again in 2009, when European investors were bullish, and no-one was paying much attention to what was going on in Athens - or Madrid.

By the end of November 2009, the euro was back up at $1.50. But then, the world discovered the PIIGS. Bad news for Greece, Ireland, Portugal, Spain and the rest, and anyone holding their government debt - good news for the eurozone's exporters, especially the German ones.

The longer eurozone policy makers fudged and delayed, the more competitive German exporters became. At the end of May 2010, the euro was down at $1.20.

Since then, the currency has been even more closely linked to ministers' ability to keep a grip. Amazingly, it was back at $1.40 at the end of the year, as traders briefly stopped worrying about Portugal and Spain. Then it slumped again - falling again, today, on fears that ministers would not make much headway on proposals to expand the eurozone's new bailout facility - the EFSF - and/or make it more nimble in response to market shocks.

I don't think that the eurozone's finance ministers are failing to resolve the crisis on purpose. It's not as if this is an easy problem to fix. And of course, a full-blown panic over Europe's sovereign debt would do far, far more damage to Europe's financial system and its economy than a rise in the value of the euro. And this degree of volatility in exchange rates does no-one any good - exporters least of all. Still, in this "race to the bottom" among the major currencies, Europe's knack for crisis mis-management may be the strongest weapon it has left.

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