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Earnings growth disappoints, household finances under pressure

Ben Brettell, Senior Economist, Hargreaves Lansdown:

Unemployment remains at a multi-decade low of 4.6%, but wage growth for the three months to April undershot economists forecasts, meaning the squeeze on household finances is worse than previously thought. Regular pay (excluding bonuses) grew by 1.7%, meaning that after inflation average earnings in the three month period fell by 0.6% year-on-year.

The ONS revealed yesterday that inflation jumped to 2.9%, the fastest pace for almost four years.

The UK economy faces a dangerous cocktail of political uncertainty, slowing growth and shrinking real wages. First-quarter GDP figures were disappoining, while a recent report from VISA confirmed consumers are under pressure, with spending falling 0.8% year-on-year in May.

Households are being squeezed from both directions, with inflation rising faster than expected and wages rising more slowly. This doesn’t bode well for economic growth – the UK economy is heavily reliant on the consumer and falling real incomes will eventually translate into lower retail sales.

Wage growth is one of the Bank of England’s key metrics when setting interest rates, as higher wages can ultimately create upward pressure on prices. As yet it seems there is little evidence of this type of ‘wage-price spiral’, which should give the Bank enough latitude to look through higher inflation and hold rates at 0.25% for now.