Photographer: Chris Ratcliffe/Bloomberg

British Households Feel the Pinch as Real Earnings Almost Stagnate

  • Average incomes rise just 0.1% when adjusted for inflation
  • But flexibility on wages may prevent a jump in unemployment

U.K. living standards are under more pressure than at any time in 2 1/2 years and the squeeze is getting tighter.

Adjusted for inflation, regular pay rose just 0.1 percent in the three months through February, the weakest since the third quarter of 2014. That figure could turn negative in the coming months if forecasts for a further pickup in price growth -- to 3 percent or even higher -- come to pass.

Inflation has jumped in the past year because of the pound’s decline since the Brexit vote and that, coupled with lackluster wage growth, is eating into the spending power of consumers, the engine of the economy. But there was some hope for shoppers on Wednesday that the outlook might not be as bad as feared. Tesco Plc, the U.K. supermarket leader, said it would absorb some of the sterling-induced cost bump and keep prices low, which could ramp up pressure on competitors to do the same.

There’s still likely to be a squeeze on consumers, with the Bank of England predicting that wage growth will remain “modest.” But some wage flexibility may actually be a good thing if economic growth slows as predicted, according to Tapan Datta, head of asset allocation at Aon Hewitt.

“Wages have been flexible, that’s taken the strain,” Datta said on Bloomberg Television. “At least the employment levels are not going to necessarily be jolted hugely.” The squeeze is “probably better than having a a lot people thrown out of work,” he said.

In February alone, real earnings fell 0.4 percent, the first single-month decline since August 2014. Three-month nominal incomes rose an annual 2.2 percent, the weakest since July.

Record Vacancies

Earnings are slowing despite unemployment -- at 4.7 percent -- being close to historic lows. In the latest three months, the number of people in work rose by 39,000 to a near-record 31.8 million. Vacancies in the first quarter rose to the highest ever.

While one Bank of England policy maker has responded to accelerating inflation and broken ranks to vote for a rate increase, the majority are focused on the wage metrics. They say the sluggish performance suggests there is slack in the labor market that could weigh on pay settlements for years, meaning there is no urgent need to tighten.

“Involuntary part-time and self-employed workers, the threat of future job losses due to automation, demographic changes, all work in the direction of leading to less upward wage pressure for a given level of unemployment,” Gertjan Vlieghe of the BOE said last week.

The BOE says the jobless rate can fall as low as 4.5 percent without fueling inflation, though that may not be tested anytime soon. Economists see unemployment edging up to 5.1 percent by early next year as Brexit negotiations take their toll on demand and investment. The slowdown may already be happening, with the increase in employment in the latest period falling well short of forecasts.

“Households are being caught in a perfect storm of rising inflation and slowing labor income growth,” said Samuel Tombs, an economist at Pantheon Macroeconomics in London. “The continued weakness of core wage growth bolsters the view of the majority of MPC members that interest rates do not need to rise this year in order to combat inflation.”

— With assistance by Mark Evans, and Harumi Ichikura

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