Todays UK inflation figures have been given extra spice by yesterdays revelation from the ONS that the average Britons wages are finally rising again in real terms.
For almost a year, the rising cost of living has outpaced average wage rises, eroding Brits spending power and having a chilling effect on the UKs consumer-led economy.
Amid the smorgasbord of measures of inflation due to be released today, perhaps the best-known is the Consumer Price Inflation, which at the last count stood at 2.7 per cent – still above the Bank of Englands 2 per cent target, but falling.
If we assume that CPI will continue to inch back towards the Banks target and wages carry on rising at a decent clip, then it is surely just a matter of time before we all begin to feel the benefit.
Obviously, rising wages are a positive thing in of themself. But they also reflect the tightening of the jobs market to such an extent that employers are now having to offer higher salaries in order to attract the right people to fill roles.
The fact that some economists expected wage rises to be higher than they turned out to be on Tuesday doesnt really change this much.
To hike or not to hike
Nevertheless, wage rises also have a down side – as they are themselves inflationary.
So if CPI falls, as forecast, to 2.6 per cent this morning, its likely that wage rises will outpace CPI for a few months – only for CPI to tick up again later in the year.
All of which leaves the Bank of Englands Monetary Policy Committee (MPC) with a quandary on its hands when it comes to interest rates.
Next weeks first quarter GDP figures may not provide much clarity on the true state of the economy, as they are likely to have been adversely impacted by Springs extreme weather.
As a result, when the MPC meets in May, it will have to base any decision to raise interest rates – or not – on some fairly scant GDP evidence, and its hunch on whether falling CPI will be reversed by rising wages.
While the MPC isnt known for taking gambles, the current climate may force it to do so. A May rate hike still seems likely, and the markets currently think there is an 85 per cent chance of one. But the Committee might prefer to do so with more solid evidence than it will probably have available to it.
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