Today we are bringing you an overview of the so-called Misery index, a measure that shows how an average citizen is doing economically, by looking at the unemployment rate and adding it to the annual inflation rate.

This economic indicator was created by the economist Arthur Okun. The principle behind it is that both the inflation rate and the unemployment rate have one of the most considerable impacts on regular citizens, as inflation eats away at disposable income. In contrast, unemployment makes getting disposable income even harder. It should be noted that data for August 2022 was used, as this is the last data point when data for all countries and regions are available, as some countries are yet to release their September CPI numbers. As the current macroeconomic outlook is quite bleak, with expectations of a recession in both the EU and the US, looking at how this index is doing will allow us to answer the question, is the world as miserable as it seems?

Misery index for select countries and regions (March 2014 – August 2022, YoY, %)

As can be seen in the index, the index stands quite high in August 2022, which is to be expected due to the high inflation rates currently present in the world. Currently, the country with the highest points in this index is Bulgaria, at 21.6%. Following them, we have Romania at 20.26%, Croatia at 18.6%, Hungary at 16.7%, the Eurozone, at 15.7%, Slovenia at 14.8%, and finally, the United States at 12%.

How does this compare to the same period last year? Even though August 2021 was a lot more influenced by the pandemic, its score in terms of the misery index is a lot better. For comparison, the index stood at 10.8% in the United States, which would mean it increased by 1.2 p.p. YoY. However, the US with its low base is quite an exception and not the rule. Looking at the other countries, the by far largest increase was experienced by Bulgaria, where the index increased by 12.6 p,p. Following them, we have Romania, where it grew by 10.1 p.p., Croatia, where it increased by 8.4 p.p., Slovenia, where it grew by 8 p.p., and finally, Hungary, where it increased by 7.5 p.p. In the Eurozone, the growth amounted to 5.8 p.p. in this period.

Furthermore, comparing the current numbers with the average since 2014, the misery index is 4.5 p.p. higher in the US, 5.3 p.p. higher in the Eurozone, 5.4 p.p. higher in Croatia, 7.3 p.p. higher in Slovenia, 7.8 p.p. higher in Hungary, 12.1 p.p. higher in Romania, and finally, 12.7 p.p. higher in Bulgaria.

So having this in mind, it would seem that the current situation is quite bleak, at least when it comes to the numbers. But again, taking this without a context would not make much sense, as the two contributing factors to the index, inflation and unemployment rate, both have a significant role at different times. For example, currently, the high inflation rate contributes 58% to the misery index in the Eurozone, 66% in Croatia, 69% in the United States, 74% in Slovenia, 76% in Romania, 82% in Bulgaria, and finally, 93% to Hungary. However, just a year ago, the story was completely different. In August 2022, inflation contributed 57% to the misery index in Hungary, which would mean that in course of a year, it increased by 36 p.p., with a similar story in Croatia, where it also increased by 36 p.p. YoY. In the US, however, the numbers are somewhat lower, and inflation contributed 49% to the misery index, meaning that the increase was a somewhat lower 20 p.p. YoY. In other more extreme cases, like Slovenia, the inflation rate amounted to 31% of the total misery index in August 2021, meaning that its contribution grew by 43 p.p. YoY, while in Bulgaria, we can see a similar story, where inflation increased its contribution in the index from 41% to 82% YoY. Finally, in the Eurozone, inflation contributed 30% to the misery index a year ago, which would mean that it increased by 28 p.p. YoY.

Annual inflation rate of select countries and regions (March 2014 – August 2022, YoY, %)

It should be noted that the inflation growth was already picking up pace by mid-2021, so looking at the YoY data would not tell the whole story, as inflation was already above its average levels by August 2022. Having this in mind, it would be better to compare the current number to the average during the last 8 years. Here we can truly see the stark difference between the numbers. On average, inflation contributed 33% to the misery index in Hungary in the last 8 years, 30% in the United States, 25% in Romania, 22% in Bulgaria, 15% in Slovenia, 13% in the Eurozone, and finally, 10% in Croatia.

This would mean that at current numbers, the inflation rate is contributing significantly more, at times 3-4 above its average contribution to the index. Taking this by itself does not offer much value, however, as it could be said that inflation rates are higher and thus the index is higher. While that might be true, what can then be taken away from this is that the unemployment rate plays a lot more of a crucial role in normal periods than inflation does.

With inflation growing so rapidly, and the threat of a recession looming ever closer, one would also expect an increase in the unemployment rate. However, this has just not proven to be the case, at least not yet. The unemployment rate (seasonally adjusted) stands at 6.6% in the Eurozone in August 2022, 6.3% in Croatia, 4.9% in Romania, 3.9% in Bulgaria, 3.8% in Slovenia, and 3.7% in the United States. Hungary is the only outlier here, where the unemployment rate stands at 1.1%.

How does this compare to the average in the last 8 years? For all countries and regions observed, the unemployment rate is at 8-year lows. For example, in Croatia, the unemployment rate is 5.6 p.p. lower than average in August 2022, in Hungary, its 3.6 p.p. lower, while in other countries it is between 3 and 0 p.p. lower than usual.

Unemployment rate (seasonally adjusted, March 2014 – August 2022, %)

So, what can be taken away from this data? Given that this index tracks 2 very important indicators for the economic well-being of citizens, one thing could be said: Even though the inflation rates are really high right now, it has (at least) not yet spilled over to the companies in terms of them having to lay off people to continue normal operations. In fact, the opposite is currently happening in labour markets across Europe and the US, with a lot of the workforce missing. Attracting new workers where they are needed also means that companies have to offer higher salaries, which means they have to raise the prices of their products. This would mean that in a sense, currently, we are paying for a low unemployment rate with high inflation.