For every month since May 2010 inflation has been greater than the rise in average wages, and this month will be no different, with the announcement last week that inflation will remain well in excess of pay rises for the average British worker.
The consumer price index (CPI) measure of the cost of living remained well above the Bank of England’s government-set target, at 2.8%, while the broader retail price index (RPI) was 3.1%, with both measures greatly outstripping average pay growth.
In order to expand the UK economy, we need consumers to spend more money, and to do this we need them either run up debts (which is obviously unsustainable in the long term) or start earning more. With inflation being high and the increase in average wages being low, this hasn’t happened, and the economy will continue to struggle until something gives.
The Bank of England does predict that inflation will fall back to the 2 per cent target, but then again, the Bank has had a habit of predicting that for some time, and – as you are probably full aware, its record is woeful. There are however, some reasons to think that UK inflation may be close to peaking, and that it will fall back within a few months – which is what is needed.
Sterling has not crashed as some expected, and seems to be fairly steady at this moment in time. We haven’t seen commodity prices crash, but then again neither have we seen them rise sharply. Collectively, the relative resilience of Sterling and the end of the commodity market boom may well mean less inflation further forward, and this is what the banks are predicting.
If this were the case, and inflation can fall back to 2 per cent, alongside an increase in wages staying at 1.7%, then the gap between inflation and wages would almost disappear. Only a minimal change is needed to create a positive rise in real wages. We now need to wait and see if this is the case.