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Wage growth accelerates – what does it mean for inflation?
The ONS published the UK’s latest labour market report this morning, which showed wage growth accelerated in the period between October and December. Regular earnings grew by 5.9% on an annual basis during the period, up from 5.6% in the previous three-month period. Meanwhile, total wage growth (including bonuses) came in at 6%, up from 5.5% previously. Wages are a big driver of inflation, so this could spell bad news for future price increases.
That said, businesses have warned that the labour market could take a hit later this year when new tax policies come into effect in April. The government is raising employers’ National Insurance contributions, and businesses have warned they may need to reduce working hours or headcount to offset the effects. Wage growth is expected to slow too, as employers look to mitigate the effects of an increasingly expensive wage bill by limiting the size of any pay rises.
Commenting on the outlook for the labour market, Danni Hewson, head of financial analysis at investment platform AJ Bell, said: “It feels like we’re enjoying the calm before the storm. Big black clouds are swirling on the horizon if you factor in all the surveys and data from recruitment agencies which suggests that businesses are cutting back on their hiring intentions for the year and will consider job cuts and smaller wage hikes after April.”
Inflation forecast: naturally, not everyone agrees
While most analysts seem to be forecasting a headline figure of 2.8%, not everyone agrees. In its UK economic outlook published last week, the National Institute of Economic and Social Research (NIESR) said it expects inflation to rise to 3.2% in January, before slowly falling back to target. It expects inflation to average out at 2.4% in 2025 as a whole.
Meanwhile, the economists at investment bank Deutsche Bank are forecasting a headline figure of 2.9%. Senior economist Sanjay Raja writes: “Our models point to headline CPI pushing up to 2.9% year-on-year. We see core CPI pushing higher to 3.8%. Services CPI, we think, will move up to 5.25%. And the Retail Prices Index (RPI), we estimate, will push higher to 3.7%.”
One day to go until January’s inflation report
Good Tuesday afternoon, and welcome to MoneyWeek’s inflation live blog. The sun is shining in London today and it feels like spring is on the way. The outlook for inflation is less bright, though.
The headline CPI figure is expected to come in at 2.8% tomorrow, up from 2.5% in December. A bounce in airfares and the introduction of VAT on private school fees are two factors that could contribute to the rise.
It comes after the Bank of England recently warned that inflation could hit 3.7% in the third quarter of this year, primarily driven by a rise in global energy prices. The Bank is pleased with the progress we are seeing in domestic parts of the economy, though, and expects this inflation bump to be relatively short-lived.
