Strategy & economics
Good news for consumers as real wages finally grow
Falling inflation means workers are enjoying an increase in spending power
March’s UK inflation report confirmed the downward momentum in 2018, as the impact of weak sterling fades rapidly. This is great news for consumers as they finally see a return to real wage growth, suggesting the trend in household consumption should improve this year.
- UK headline inflation (CPI) slowed more than expected from +2.7% year-on-year to +2.5% in March (as opposed to the expected +2.7%). Core CPI slowed from +2.4% to +2.3% (as opposed to the expected +2.5%). Both figures are now the lowest in a year. The largest downward contribution to the change in the CPI rate came from clothing and footwear (mainly women’s clothing). Alcoholic drinks and tobacco also made a large downward contribution, in part due to tobacco duty rises that took effect in March 2017, but where there were no corresponding increases in March 2018 (due to change in timing of the Budget)
- The slowdown in headline CPI is likely to be more restrained over the course of Q2 to Q3, as the YoY growth in energy prices will come through, assuming oil prices remain at $70. This could add +0.2% YoY to headline CPI by Q3. However, this positive impact will abate in Q4. With core CPI to continue softening (drawing on lead indicators like producer prices and import prices), we think headline CPI will end the year just above 2%.
- The UK labour market report shows a fall in the unemployment rate to 43-year low (4.2% from 4.3%, as expected) and an acceleration in regular wage growth to the fastest in 2.5 years (+2.8% YoY from +2.6%, as expected). As a result of the pickup in regular wage growth, real wage growth turned positive (+0.2% YoY) for the first time in a year. If the trend in real wage growth can be sustained, it will be helpful to consumer spending this year. We think this outcome likely, given the trend in UK CPI is slowing towards the lower end of 2% and nominal wage growth is likely to pick-up towards 3% YoY due to tightness in the labour market. This will bring real wage growth back to around pre-referendum pace.
- Today’s report modestly lowers the chance of a rate increase in May, though the probability of an increase - as indicated by interest rates futures - remain very high at 80%. The Monetary Policy Committee remains cautious on domestically generated inflation via wage growth, so today’s report may do little to deter the MPC from raising interest rates at some point this year, whether May or Nov. We think the MPC should be comfortable to move in May given that an increase is largely priced in.
Sources: Datastream, Bloomberg, 18 April 2018
Janet Mui, CFA is the global economist at Cazenove Capital, the wealth management division of Schroders. Janet is responsible for the formulation and communication of Cazenove’s top-down views. She is a member of the investment committee that oversees strategic and tactical asset allocation at Cazenove. Janet is also the macro spokesperson and a regular commentator at major media outlets including the BBC, Bloomberg and CNBC.
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