UK inflation surprises to the upside – now watch wages

This morning’s inflation data was higher than expected, with the CPI measure targeted by the Monetary Policy Committee coming in at +2.7% from a year ago against +2.4% the previous month. The headline RPI measure was also very strong at +3.9%. For me, the biggest risk to further UK rate hikes remains the prospect of workers seeing this headline rate of inflation approaching 4% (it’s not been there since mid 1998) and demanding higher wages in the forthcoming pay bargaining rounds. For all the MPC’s focus on the CPI, the public still look to the RPI as their preferred measure – and why not? After all given that housing is a huge factor in our spending why should it be excluded from the inflation data as it is in the CPI? Income Data Services, a consultancy, have pointed out that Ford, Rolls Royce and the Air Traffic Controllers – amongst others – all have automatic pay links to the RPI rather than the CPI.

 Looking at the breakdown of the inflation numbers and it’s clear that a major factor has been the growth in household bills, and especially energy costs. They are up 11.1% year on year – the highest increase ever recorded. This again is a worry, not least for those on low incomes such as the elderly where this non-discretionary spending forms a much larger percentage of their “personal” inflation basket than for the average where falls in the prices of plasma screen TVs, CDs, and designer clothes can offset part of the rise in fuel bills. Even for those of us who do benefit from deflation in these other items, the regular increases in utility bills have been much more memorable, and newsworthy.

So far wage inflation has remained very well behaved. In the third quarter of this year it was running at a +3.9% rate (i.e. at the same rate as current headline inflation) – so in fact the workforce has not been able to increase its “real” take home pay, despite a small increase in productivity. If this changes, expect higher rates from the Bank of England next year. Just two things will keep the Bank from hiking again – further signs of a significant economic slowdown in the US, and a collapse in our own domestic consumption. For choice I still lean towards expecting another hike, early in 2007. But is it just me, or do the shops feel pretty empty this Christmas?

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

Jim Leaviss

Blast from the Past logo Blast from the Past logo

16 years of comment

Discover historical blogs from our extensive archive with our Blast from the past feature. View the most popular blogs posted this month - 5, 10 or 15 years ago!

Next Blogs