UK wages rising at the fastest pace in almost three years

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UK wages rising at the fastest pace in almost three years

Recent figures released by the Office for National Statistics (ONS) shows UK wages rising at the fastest pace in almost three years.

According to the ONS, earnings excluding bonuses, increased by 2.8%, outstripping inflation which has slowed to 2.7% over the year to end of February.

According to Bloomberg’s contributor composite forecast, expectations from analysts and investment banks point to UK consumer prices (CPI) falling to 2.5% by the end of the year and 2.2% in 2019. If these forecasts are correct then fears of a further squeeze on household income will ease.

UK Wage and Price Growth (Rolling Year-on-Year)

Source: Office for National Statistics, March 2018.

The better news on inflation and wage growth picking up comes against a back drop of better employment data. Figures released by the ONS show the jobless rate for the UK falling to 4.2%. Unemployment is now at its lowest level in 43 years and is below the Bank of England’s estimated equilibrium rate. When an economy reaches its peak level of employment it usually leads to a shortage of workers with the required skill set. This in turn leads to higher wage demands.

The possibility that higher real wage growth will translate to higher consumer spending is not universally accepted. There are many variables in the mix to consider, such as the effects of currency. For example, strong appreciation in Sterling’s value over the year (10.25%) has been the core component in supressing inflation, reversing some of the impacts caused by the sharp depreciation in sterling after the Brexit vote. The level of debt in the UK is also high which means that an interest rate increase expected in May will restrain spending. We also have the ebb and flow of oil prices with recent increases at the pumps acting as a tax on consumer spending.

The inflation and wage figures this week are positive. This allow some wiggle room for the Bank of England to consider increasing interest rates, with a slight increase being forecast to happen in May. With signs of productivity improvements and an opportunity to put agreement around Brexit into place the economy has potential to move onto a firmer footing.

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