What’s the outlook for UK consumers as pay slips against inflation?


UK pay rises have been failing to keep up with inflation according to figures released by the Office for National Statistics this morning.

Wage growth excluding bonuses came in at 2.1 per cent for the three months to March and fell 0.2 per cent in real terms during that period.

But economists are mixed on the outlook for inflation-adjusted wages.

Hargreaves Lansdown senior economist Ben Brettell says “household budgets look certain to be squeezed further in the coming months”.

Yesterday’s inflation figures showed a jump of 2.7 per cent.

“The economy has surprised on the upside since last summer’s referendum, powered by a resilient consumer, but it looks like households are now starting to feel the pinch,” Brettell says.

Employment figures were more positive rising 122,000 in the three months to March taking unemployment to 4.6 per cent – the lowest level since 1975.

Capital Economics UK economist Paul Hollingsworth says while modest nominal wage growth may not be enough to keep up with inflation this year, which he expects to peak just over 3 per cent, next year is a different story.

“As inflation begins to fall back next year as the upward pressure from the drop in the pound starts to fade, we think that real wages will begin to rise again.

“As a result, the forthcoming squeeze on real wages should be nowhere near as severe or prolonged as that seen after the financial crisis.”

In contrast, IHS Markit chief economist Howard Archer says they remain skeptical that the labour market can sustain its current firmness Brexit negotiations magnify uncertainties.

Employers expect median pay to increase just 1 pre cent in the 12 months to March 2018, a CIPD/Adecco Group survey shows, down from an increase of 1.5 per cent expected in the previous survey three months ago.

Archer says: “Companies are keen to try and limit pay as they face an increasingly challenging domestic environment and as their input costs have been lifted markedly by the sharp overall weakening of the pound.”