UK prices and earnings confirm divergence

by Cheyne Wilcocks MSc | 26th February 2019

Following the Office of National Statistics (ONS) releases of Inflation and Price Indices and Labour Market Statistics on the 19th and 13th February, respectively, a clear divergence between the Consumer Price Index (CPI) and Average Weekly Earnings (AWE) has emerged.

AWE have been steadily increasing over the last 6 months from 2.4% in June last year to 3.4% in December, albeit remaining unchanged between November and December. The CPI, on the other hand, has fallen from 2.4% in October last year to 1.8% in January this year (AWE statistics release lag CPI statistics release by 1 month). As can be seen from the chart below there is a definate divergence between these two statistics now taking hold.


Source: Office of National Statistics (ONS), https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/d7g7/mm23
Source: Office of National Statistics (ONS), https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/earningsandworkinghours/timeseries/kac3/lms

It is desirable for there to be a healthy margin between CPI and AWE in favour of the latter. This leads to wage increases being meaningful rather than being eaten up by price increases. However, the outcome and, to date, affects of Brexit could dissolve the developing margin. The Bank of England have indicated they expect ecomomic activity to reduce going forward for the short term which could lead to wage growth to start stagnating or reduce. The UK currency, Sterling, could also weaken further leading to increased import prices putting pressure on prices.

The combination of price rises and reducing wages will lead to a toxic mix leading to wage increases falling below inflation once again.

How this will play out is not easy to predict at the best of times, let alone when faced with the fact so much depends on the very unpredictable outcome of Brexit. Of course, all this has a bearing on the direction of base rates as set by the Bank of England and how lenders interpredate them going forward.

Why not see what rates are available now.


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