What's going on?
A swathe of UK economic data out this week has highlighted the grim reality that workers’ pay growth continues to lag behind the rise in the cost of living (a.k.a. inflation) – and the number of people in employment is falling!
What does this mean?
For the second month in a row, the number of people employed in the UK fell. Some context is required, however: the number of employed hit its highest level since the 1970s earlier this year, so this is just a moderate pullback from a peak. Perhaps more concerning is the fact that wage growth, at 2.5% versus a year ago, remained below inflation (which came in at a toppy 3%) – meaning that goods and services continue to get more expensive for the man and woman on the Clapham omnibus.
Why should I care?
For you personally: Your “real” pay could start improving soon.
The value of the pound has strengthened over the past year as, among other things, the perceived economic downsides of Brexit have diminished somewhat (a better economy tends to draw international investors to the pound). A strengthening pound should feed through into a smaller increase in import prices, thus dampening inflation. In other words, inflation may have peaked for the foreseeable future. If wage growth can hold steady (or increase), it might not be long before your wallet finally starts to feel a bit heavier.
For markets: Investors care about what all of this means for UK interest rates.
The Bank of England (BoE) is wary of inflation getting too high – it targets around 2% (why? click here). So if inflation were to persist above 3%, or increase further, the BoE is more likely to once again increase interest rates. Conversely, if inflation started to fall, there would be less upward pressure on interest rates (click here to read about how interest rates can affect investments).