Households may be feeling the pinch later this year, suggest economists, but data out yesterday indicates that actually things may not be so bad.
Inflation is up, boo hiss! Wages are up too, hurrah!
UK inflation rose to 1.6 per cent in November, a two-year high. There was more than one reason. Last year’s fall in the pound is doing some damage, but then inflation was also up in the Eurozone last month. Another driver has been rising energy and food costs.
The real pain caused by the falling pound is ahead. It took three years from the 2008 sterling crash for inflation to peak.
Rising inflation makes us worse off, hitting household disposable income. It is bad news for companies that sell to the UK consumer.
Then again, according to data out yesterday (18th January), wages including bonuses rose by 2.8 per cent in the three months to November. And in November, inflation was just 1.2 per cent. It seems that real wages are still rising at quite a pace.
The question is, can it last?
We have been here before.
For four years, between early 2010 and 2014, inflation was higher than growth in wages. And that hurt the economy, and it hurt business.
The gap is closing again, but so far slowly.
UK core inflation – that’s without food and energy – was also 1.6 per cent in December, but the difference is that UK core inflation has barely flickered in over a year.
Economists reckon that wage growth is set to reverse, maybe it is, but they have been predicting this for some time.
They are also saying that inflation will pass three per cent later this year. In that respect, they are more likely to be right.
So, what does this mean for UK consumer focused businesses?
It depends on wages. If they keep rising, as they have been doing for the last few months, then real wage growth may remain positive. But then again, if this happened, the Bank of England is more likely to increase interest rates.
But if wage growth slows, as economists predict, then that will hit consumption, but at least rates are more likely to stay on hold.
