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Inflation-busting pay rises may finally have arrived
Lower petrol prices help inflation fall to a four-year low of 1.7%. Workers may be enjoying real wage growth for the first time since the crisis.
(Update) Real wage growth could have finally arrived for the first time since the financial crisis, after the Office for National Statistics reported inflation had dropped to 1.7% in February, its lowest level in more than four years.
The fall in the consumer prices index (CPI), from 1.9% in January, means that going on the latest official data, the gap between pay growth and inflation is at its narrowest since April 2010.
The ONS last week reported that wage growth stood at 1.4% in the three months to the end of January. That headline figure, however, hides the big jump in wage growth at the end of last year: growth was 0.8% in November but rose to 1.7% in December and January.
Chris Williamson, chief economist at Markit, said he suspected that wage growth was now at least on a par with inflation, if not ahead of it, although the lag in official data means we will have to wait for confirmation.
Williamson argued that the next three months was likely to see a further pick up in the pace of wage growth, and that it was likely to be approaching 3% by the summer. In some sectors, such as manufacturing, construction and retail, wage growth is already at that level or higher, with weak salary increases in financial services and the public sector dragging down the headline rate.
‘The potential for wages to start rising strongly should not be underestimated, given the speed with which the labour market is improving,’ said Williamson, adding that it could mirror the sharp drop in unemployment levels.
Falling petrol prices were a major contributor to the drop in CPI, with 0.8p shaved off a litre between January and February, compared to a 4p rise over the same period last year. Diesel prices experienced a similar drop. A combination of price rises and reductions for gas and electricity, compared to rises a year ago, were another factor while the price of clothing and footwear rose by less between January and February than over the same period last year.
These slower price increases all helped to offset the effect from furniture, household equipment and maintenance prices, which rose at a more pronounced rate than a year ago, and costs in the recreation and culture sector, which jumped similarly.
Housing costs such as mortgage interest payments and council tax are not included in the CPI measure, although they are a factored into the retail prices index (RPI) measure of inflation, which also dropped month on month to 2.7% from 2.8%.
Inflation-beating wage growth is likely to be seized upon by the government, which has been repeatedly attacked by the Labour party for the fall in living standards despite strong economic growth.
However, a return to pre-crisis wage levels is still some way off. Think tank the National Institute of Economic and Social Research said last month wages were unlikely to rise above their 2009 peak until 2019 or 2020.
And quickening pay growth, while welcome, also brings with it the threat of interest rate rises. ‘If we see growth of wages and salaries pick up sharply in coming months, concerns about the feed-through to higher inflation will intensify, as will the pressure on policymakers to take some of the heat out of the economy via a first hike in interest rates,’ said Williamson.
Good news for savers
But while both inflation and interest rates remain at low levels, it creates a mixed picture for savers. ‘Lower inflation means savers are likely to continue to suffer low interest rates. However, for a few, lower inflation will mean their savings now generate a real return,’ said Adrian Lowcock, senior investment manager at stockbroker Hargreaves Lansdown.
Comparison site Moneyfacts.co.uk has calculated that with 1.7% interest rates, basic rate taxpayers would need to find a savings account paying 2.13% to beat inflation, while those on the higher rate would need to find one paying 2.83%.
It said that of 600 non-ISA accounts on the market, 37 manage to beat the effects of both tax and inflation. In the ISA market, 79 out of 214 offer inflation-beating rates.
The best fixed rate ISAs are being offered by Skipton building society, which pays 3% over five years. The highest rate available on a fixed rate bond is available through FirstSave, which offers 3.5%, although that does require savers to lock away their money for seven years. Shawbrook Bank offers the highest rate for a five-year bond, at 3.1%.
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by Daniel Grote on May 25, 2016 at 13:23