Britons Set to Relive Pay Squeeze as Inflation Erodes WagesBy
Price gains match pay rises for first time since 2014
BOE torn between supporting economy and controlling inflation
The U.K.’s consumer engine is under threat as surging inflation has eroded wage increases, meaning workers are set for their first drop in real incomes in more than two years.
A bigger-than-forecast jump in inflation last month put price growth at 2.3 percent. That’s above the Bank of England’s target for the first time in three years and, crucially, the same level as the most recent pay data.
That’s pulling BOE policy makers in two directions, as they fret about controlling the rate of price increases without hurting the economy as it faces into years of Brexit-related uncertainty. With a weaker pound pushing up import costs and further price hikes expected, some economists predict a 3 percent level of inflation is not that far away. That could push Britons back into another squeeze, having endured six years of falling real incomes through late-2014.
The surge in prices in February was led by fuel and food, with the latter showing the end of a three-year period of deflation. That’s particularly bad news for poorer households, which spend a greater proportion of their income on essential items. Core inflation also picked up.
While inflation is forecast to keep accelerating, the outlook for wages isn’t as rosy. The Bank of England expects growth to remain modest, and the most recent labor-market data showed it cooled to 2.3 percent in the quarter through January from 2.6 percent.
While food prices are already shifting, other retail sectors may soon follow as rising costs increase pressure on margins.
Keith Down, finance director at home furnishing chain Dunelm Plc, said last month that the company is “seeing cost pressures” and is passing them “straight on to the customers.”
There are some signs that inflation may be beginning to hit consumers’ finances. Household spending growth slowed to 0.7 percent in the fourth quarter from 0.9 percent, and a drop in retail sales in January suggests it may have weakened further. A risk for U.K. Prime Minister Theresa May is that if the economy does begin to slow it could weaken her hand in the Brexit negotiations she is set to trigger on March 29.
“The U.K. consumer outlook is more challenging than we have seen in recent years, with industry-wide pressures emerging in commodities as well as labor costs,” Greggs Plc Chief Executive Officer Roger Whiteside said at the end of last month.
With BOE officials facing both accelerating prices and the possibility of Brexit uncertainty and weaker household finances, they’re trying to balance the two by saying they will tolerate inflation overshooting their target and maintaining their support to the economy.
However, that stance could be tested if inflation moves beyond being just currency driven and there’s a pickup in domestic price pressures. Policy maker Kristin Forbes broke ranks this month and voted for an interest-rate increase, and some others indicated that they may also be leaning that way.
“So far, there is scant evidence that the inflation rise the U.K. is seeing is more than just the impact of sterling,” said Liz Martins, an economist at HSBC in London. “Real wage growth may already have entered negative territory -- ending the 28-month stretch that has provided support to consumption in the U.K. in the post-referendum period.”
— With assistance by Simon Kennedy, and Lucy Meakin