Wage rises to outstrip inflation


Pay increases are set to outstrip inflation for the first time in six years as the economy gathers pace and unemployment continues to fall, according to forecasters.

Official figures are this week expected to provide the first evidence that the pressure on family budgets and living costs is starting to ease, with the annual inflation rate down from 1.7 per cent in February to 1.5pc last month, while growth in weekly earnings has risen from 1.4 per cent to 1.8 per cent.

Economists feel the gap will widen further and can be sustained without posing an inflation risk. Roger Bootle, managing director of Capital Economics, believes the difference could be soon back to its historical average of about 2pc. “In other words, the so-called cost of living crisis could soon be over,” he says in the Telegraph.

The turning point between pay and prices – and the return of an increase in “real pay” – will provide ammunition for the Chancellor over Labour and its focus on the cost of living. George Osborne has been encouraged by the reception given to Britain’s economic progress at the International Monetary Fund’s spring meeting in Washington. He returns to London to the publication of a series of key economic indicators expected to show a further fall in the jobless total, as well as the drop in inflation.

Howard Archer, chief UK & European economist at IHS Global Insight, expects unemployment to be below 7 per cent, a mark previously used by Mark Carney, Governor of the Bank of England, as a warning of an increase in interest rates. But new guidance from the Bank suggests it is unlikely there will be any material change in borrowing costs before next year. Mr Archer says a gradual but sustained rise in real pay should not pose a significant inflation risk for some time, while the improved purchasing power would support consumer spending, reducing the risk of a major build- up of debt to finance retail sales.

Two reports out today underline the recovery theme. The EY Item Club says the UK is set to experience a long period of low inflation growth as the economic recovery gains traction. Meanwhile, a Lloyds Bank regional survey shows Wales has experienced its strongest business expansion for over 13 years.

The EY Item Club, which uses the Treasury model for its forecasting, sees a combination of increased labour demand, a fall in commodity prices, the pick-up in wages, a low inflation rate, and a stronger pound, as all helping the economy. Peter Spencer, chief economic adviser, expects interest rates to remain on hold until after the next election, stimulating further investment.

A “simmering” housing market will be dampened by tighter lending criteria and an increase in housebuilding will control prices, preventing an unsustainable boom, the report adds. The Club wants the Financial Conduct Authority to maintain a tight control on the link between incomes and mortgages.

The report also suggests Britain is on course to overtake Germany and achieve the highest rate of employment in the G7. The German rate last year was 73.3 per cent for the 16-64 age group, but the UK total is expected to rise above that by 2017.

Today’s Lloyds Bank survey shows business activity across England and Wales continued to increase last month. Although the index measuring overall activity was the lowest for nine months, growth remained strong.