What's going on?
There was good news and bad news for Britain’s workers on Wednesday: pay is rising more quickly than expected, but higher prices mean that people’s pay isn’t going as far as it used to.
What does this mean?
The unemployment rate hit a four-decade low and pay rose by 2% in the three months to May (versus a year ago), up from the 1.7% comparable figure in April. However, once taking inflation into account, wages actually fell by 0.5% – the worst rate of “real wage growth” since 2014. In short, prices in Britain are going up more quickly than wages.
Why should I care?
For you personally: Inflation has a big impact on your spending ability.
Unsurprisingly, the prices of things matter: the higher they go, the less stuff you can afford to buy (all else being equal). The good news is that inflation is expected to peak later this year. That’s largely because inflation is measured by looking at prices today relative to one year ago. Since the pound sold off most sharply in the latter half of 2016 (and, therefore, the prices of imports jumped dramatically), the biggest feed-through effect should happen later this year. If (and it’s a big “if”) pay rises can continue, the situation for the consumer should start getting rosier next year.
For markets: More wage growth will encourage the Bank of England (BoE) to lean towards raising its target interest rate.
If wage growth continues, it would likely push up inflation more broadly (because people can spend more money, thereby putting upward pressure on prices). But since the BoE is wary of inflation getting too high, it would be more likely to increase interest rates – which has an impact on investments (find out how here).