Is the earnings squeeze over?

The rate of inflation has now fallen below the annual growth in average wages.

The cost of living crisis is at an end, it seems. The latest British economic data shows the annual inflation rate (as measured by the consumer prices index) falling to 1.6% due to stable petrol prices and cheaper clothing and household goods.

With producer prices growing even more slowly, said Capital Economics, "price pressures in the inflation pipeline are still extremely weak". Critically, inflation is now below the annual growth in average wages.This means that "the six-year squeeze on real earnings is finally over".

As well as rising real wages, the jobs market is also in rude health, noted the Financial Times. "The jobless rate fell to 6.9% of the workforce," the lowest since February 2009. Employment rose to a record 30.39 million. The only fly in the ointment is that "almost two-thirds of the increase was in those who were self-employed, up to a record 4.5 million".

What the commentators said

This, and the "continuing strong growth and declining spare capacity", suggests that "monetary policy should be tightened, regardless of what is happening to the consumer price index".

Well, real wages may be rising a bit, said Larry Elliott in The Guardian but "don't spend it all at once". As he pointed out, "inflation as measured by the now unfashionable retail prices index (RPI), for example, is running at 2.5%, which would mean real wages were still falling".

In any case, wage growth "is unlikely to match that of the early 2000s, a period when the economy had been growing strongly for a decade". Overall, "it will take several years to recoup the 10% drop in real wages since 2008".

Recommended

Why we will be reliant on fossil fuels for a long time to come
Energy

Why we will be reliant on fossil fuels for a long time to come

The energy crisis has shown us just how reliant we still are on fossil fuels. And we will continue to rely on them for a long time yet, says Merryn So…
27 Sep 2021
How the UK can help solve the semiconductor shortage
UK Economy

How the UK can help solve the semiconductor shortage

The EU’s plan to build a semiconductor manufacturing industry will fail, but the UK should take advantage of that, says Matthew Lynn
26 Sep 2021
What's behind Britain’s looming energy crisis
Energy

What's behind Britain’s looming energy crisis

Global natural gas prices have soared as resurgent demand collides with supply disruptions. The UK is especially vulnerable and could be heading for a…
24 Sep 2021
Why is the UK short of CO2 and what does it mean for you?
UK Economy

Why is the UK short of CO2 and what does it mean for you?

The UK is experiencing a carbon dioxide shortage that could lead to empty shelves in supermarkets. Saloni Sardana explains what’s going on and how it …
21 Sep 2021

Most Popular

A nightmare 1970s scenario for investors is edging closer
Investment strategy

A nightmare 1970s scenario for investors is edging closer

Inflation need not be a worry unless it is driven by labour market shortages. Unfortunately, writes macroeconomist Philip Pilkington, that’s exactly w…
17 Sep 2021
Two shipping funds to buy for steady income
Investment trusts

Two shipping funds to buy for steady income

Returns from owning ships are volatile, but these two investment trusts are trying to make the sector less risky.
7 Sep 2021
What really causes inflation? Here’s what prices since 1970 tell us
Inflation

What really causes inflation? Here’s what prices since 1970 tell us

As UK inflation hits 3.2%, Dominic Frisby compares the cost of living 50 years ago with that of today, and explains how debt drives prices higher.
15 Sep 2021