UK inflation saw a big jump in February, but there is a deeper concern.It’s the combination that is worrying. UK inflation jumped from 1.9 per cent in January to 2.3 per cent in February, the highest level since September 2013. That’s bad enough. But last week data on the UK labour market revealed that growth in average wages has been falling. After peaking at 2.8 per cent growth in average weekly wages in the three months to November, average wages in the three months to December grew by 2.6 per cent and in the three months to January by 2.2 per cent.
That means that unless the pace of growth picked up in February, average wages are now rising at a slower pace than inflation, or, real wages are falling.
Falling real wages are bad news for consumer demand, retail sales and house prices.
It does not necessarily mean that UK interest rates are going up any-time soon. In the last meeting of the Bank of England’s rate setting committee, the MPC, one member, Kristin Forbes, voted for a hike in interest rates. But there has been dissent in the ranks of the MPC before, and bear in mind that earlier this decade, UK inflation was much higher, but interest rates stayed on hold
Inflation is rising across much of the world, in the US, China and euro area, for example. But there is a specific UK problem. In the UK, in February, core inflation – with food energy and tobacco, taken out – jumped from 1.6 to 2.0 per cent, and that is more of a UK problem, as core inflation is more contained in the US and euro area. Post Brexit falls in sterling probably explain the surge in UK core inflation.
Producer prices are up too, with output prices - also known as factory gate prices – up 3.7 per cent, the highest rate since 2011, and input prices at 19.1 per cent, down the month before, but even so, the second lowest rates since 2008.
Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics said: "Looking ahead, CPI inflation will struggle to rise further in March, due to the later timing of Easter this year compared to last; prices for travel and accommodation usually rise around Easter. But inflation will jump in April as the Easter effect then boosts the annual price comparison and as electricity and natural gas prices rise sharply.”
He continued: “Meanwhile, the E.C.’s measure of the proportion of retailers reporting that they will raise prices over the next three months recently has jumped to a level consistent with core goods inflation picking up to about 2.5 per cent in mid-2017, from 0.8 per cent in February. This rise would boost the headline rate by a further 0.5 percentage points. Food inflation also will continue to pick-up in response to the jump in import prices, while services inflation will edge higher as firms pass on hefty increases in non-wage labour costs to consumers. “
So how high will inflation go?
Mr Tombs said: “All told, we continue to think that CPI inflation will average about 3 per cent this year and peak at about 3.5 per cent towards the end of 2017. Inflation therefore looks set to exceed the MPC’s forecast for an average rate of just 2.4 per cent this year. But with the pickup chiefly reflecting sterling’s depreciation rather than domestically-generated inflation and no signs yet that wage growth is tracking inflation higher, a majority of members likely will still vote to keep interest rates on hold this year.”