Inflation is rising, but wage increases seem to be slowing.
In December, inflation was 1.6 per cent. In the three months to December, wages rose at an annual rate of 2.6 per cent. More to the point, inflation is on an upwards trajectory, wage increases seem to have peaked in November.
Economists expect inflation to carry on rising, and to pass three per cent, or maybe go higher, later this year. There is more than one reason. Inflation is on the up across much of the world, it has been rising fast in the US, and Eurozone, while producer prices have surged in China. But the UK has the additional issue of a weaker pound – exacerbating the inflation challenge.
Meanwhile, surveys suggest that employers are in no hurry to increase wages.
It is surely only a matter of time before inflation rises faster than wages, meaning real wages start falling – and that won’t be good for the consumer related areas of the economy.
But it was precisely these areas that supported the economy in Q4 of last year, consumer spending jumped nicely, consumer related services did well too – indeed, the ONS cited these two areas as the main drivers of growth in the quarter.
But since then, we have had data to show that retail sales fell in January, the Halifax recorded a fall in house prices, Rightmove recorded the lowest rate of annual growth in house prices since 2013.
In short, consumer-led growth is slowing even before real wages start to fall. What will happen in a few months’ time when real wages are falling?
On the other hand, UK manufacturing is looking promising. The recent Industrial Trends Survey from CBI hit its highest level in two years, and while the latest Purchasing Managers Index tracking UK manufacturing in January fell a little from the previous months’ good showing, a sub-index tracking output rose to its highest level since 2014.
But, in the GDP race, can the consumer successfully hand the baton over to manufacturing?
The surveys, the data and the apparent course of inflation suggests that some kind of handover is occurring, but there is a question mark over how smooth it will be.
The latest purchasing managers indexes were consistent with growth of 0.5 per cent, the odds are high that as the UK re-balances, there will be slow down in growth, but maybe nothing too drastic.