HARD-pressed UK households might feel, entirely justifiably, that they are due a break from the exhausting economic headwinds of recent years. Sadly, however, two sets of key economic statistics this week highlight the likelihood that things are set to get even worse.
The latest official figures show annual UK consumer prices index (CPI) inflation has continued to surge, while pay growth is slowing worryingly.
As most people must surely know by now, the rise in inflation is being driven in large part by the pound’s tumble in the wake of the Brexit vote last June.
Loading article content
With companies’ costs rocketing and factory gate prices rising fast, there seems to be no doubt that annual CPI inflation will continue to surge.
The soaring costs, which are driving factory gate prices higher, are being attributed by many firms to the simple arithmetical fact that sterling weakness is making imports more expensive.
In happier times, inflation need not be too much of a problem if employers agree pay settlements that enable their workers to, at the very least, keep ahead of the increasing cost of living.
However, these are most definitely not the most cheerful of economic times.
Howard Archer, chief UK economist at IHS Markit, summed up the current unhappy coincidence of factors for employees very well indeed this week.
Figures this week from the Office for National Statistics (ONS) showed annual earnings growth for employees in Great Britain, in nominal terms, slowed to 2.6 per cent in the three months to December.
In real terms, adjusting for inflation, annual earnings growth over this three-month period slowed to 1.4 per cent, its weakest pace in nearly two years.
With the surge in inflation well-trailed, and expected to continue, you would in normal times expect pay rises to accelerate sharply, not to slow.
Mr Archer said: “December’s dip in earnings growth reinforces belief that companies will increasingly look to clamp down on pay over the coming months to try and limit their total costs – and a more uncertain and likely weakening economic outlook is seen giving them scope to do so.”
The more uncertain environment, most economists seem to agree, has much indeed to do with the Brexit vote and the impending triggering of Article 50 by Prime Minister Theresa May to begin the formal two-year period of negotiations over leaving the European Union. And it is being exacerbated by her seeming appetite for hard Brexit with loss of free single market access.
It is also worth underlining the impact of the Brexit vote on companies’ pay settlement considerations, not just in relation to that weak and uncertain economic outlook but also in terms of the electorate’s decision having raised their costs and created another reason for companies to tighten their belts.
The problem for employees, in this lamentable environment, is that they have even less bargaining power than usual.
Or, as Mr Archer puts it: “Likely mounting consumer concerns over the economic and jobs outlook are seen diluting workers’ willingness to push for higher pay awards despite rising inflation. We also suspect that a likely gradual softening of the labour market as 2017 progresses will facilitate lower pay awards by companies.”
So much for the Brexit vote improving the lot of ordinary people - at the expense of what the Leave camp portrays as “elites”. It is, for sure, ordinary people who will have to struggle to make ends meet as inflation surges and pay growth slows, likely against a backdrop of rising unemployment.
ONS data this week showed annual UK CPI inflation climbed to 1.8 per cent in January – its highest rate since June 2014 - from 1.6 per cent in December. It is expected to surge towards, or above, three per cent as the year progresses. It was at just 0.3 per cent last May, just ahead of that Brexit vote.
Underlining the intense pipeline inflationary pressures, separate ONS data this week showed a 3.5 per cent year-on-year jump in UK factory gate prices in January. This was the sharpest year-on-year rise in factory gate prices since January 2012.
And UK producers’ input costs, for materials and fuel, were last month up by 20.5 per cent on January 2016 – the sharpest year-on-year rise since September 2008.
Meanwhile, a survey published by Bank of Scotland on Monday showed factory gate prices north of the Border rose in January at their fastest pace in 69 months.
Against this very challenging inflationary backdrop, which is likely to make at least some Bank of England Monetary Policy Committee members a bit concerned about holding UK base rates at a record low of 0.25 per cent, the last thing households need is slowing pay growth.
More alarmingly, they also face the grave danger that pay will soon start to fall again in real terms.
The pay problem was highlighted swiftly by economists and the Trades Union Congress in the wake of this week’s ONS labour market data.
James Smith, economist at Dutch bank ING, said: “We expect inflation to break above three per cent this year, which will mean that incomes will begin to fall in real terms…It looks like it could be an increasingly tough year for consumers.”
TUC General Secretary Frances O’Grady said: “With prices rising faster, real pay growth is now slowing down. This will be worrying for families who have still not seen their living standards recover following the financial crisis.”
Declaring that next month’s UK Budget must set out a clear plan for preventing another fall in living standards, Ms O’Grady added: “The Chancellor should tackle insecurity at work, invest in infrastructure and skills, and end the current pay restrictions on nurses, teachers and other key workers.”
Unfortunately, given the track record of the Conservatives on employment law and public spending, the TUC’s calls seem unlikely to be entertained by Philip Hammond.
However, he really should listen because, while he might perhaps be ideologically at odds with the TUC, what is proposed is entirely sensible in terms of supporting the UK economy as it is hit by Brexit.
The Chancellor will need to support demand in the economy. Ensuring employees feel secure, with their pay rising fast enough to cope with surging living costs, and a bit of infrastructure investment should get him off to a good start on this front.