Wage Growth Outpaces Inflation

Data for the last quarter 2016 shows that wages grew above the rate of inflation, leaving people better off on average. The latest official statistics show that during the final three months of last year wages increased in real terms, growing faster than would be counteracted by the rate of inflation over the same period. However, the latest figures are not pure good news, with overall trends suggesting that households could still be “squeezed” in the coming months.

The Office for National Statistics (ONS) has released data showing that UK wage growth hit an annualised rate of 2.6% in the final three months of 2016. This compares to an annual inflation rate of 1.6%, as of December 2016, according to the Consumer Prices Index (CPI).

The ONS data that was recently released for the final quarter of 2016 also sheds light on other key economic metrics. The jobless rate was unmoved, maintaining its previous level of 4.8%. Considering this represents the lowest rate of unemployment for 11 years, a lack of movement is not necessarily a bad sign. Appropriately, the employment rate is also enjoying a record high after a slight increase, and now sits at 74.6%.

While wages growing at a faster rate than inflation left people better off on average at the end of 2016’s final quarter than when it began, the trends suggest that the gap is closing and the opposite could be true in the near future. The annualised wage growth rate in the three months to December was slightly down on the figure of 2.8% seen in the three months leading up to November. The CPI measurement of the rate of inflation, meanwhile, has risen to 1.8% as of last month. Current forecasts suggest that, by the early stages of 2018, inflation could hit a level of 2.8%.

With the gap between inflation and wage growth seemingly closing, the current situation could soon be reversed. The ONS noted in its commentary on the recent data that wage growth figures, though currently outstripping inflation, are already “subdued by historical standards.” Various experts are now predicting that, within 2017, households could stop seeing their wages grow in real term and could instead be put under pressure by inflation.

Royal London Asset Management economist Ian Kernohan said: “We expect real household incomes to be squeezed this year.” Kernohan’s sentiments found agreement from senior Hargreaves Lansdown economist Ben Brettell, who said that “a deceleration in pay growth could see real wages fall.”

Brettell did, however, believe there was cause for optimism, pointing to the resilient job market indicated by record high employment rates and eleven-year lows in unemployment.

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