BRITAIN’S long-suffering workers should get a glimpse of light at the end of the tunnel this week as the gap between inflation and wage growth narrows.
Official figures are expected to show consumer price inflation (CPI) dipped to a five-year low of 1.4 per cent in September, giving the Bank of England extra wriggle room to avoid raising interest rates.
At the same time, modest wage growth is expected to have continued into August, after returning to positive territory the month before.
Howard Archer, chief UK economist at IHS Global Insight, said that given falling oil prices, the CPI could even come in below his central 1.4 per cent prediction. He added: “The inflation environment currently looks muted, particularly with supermarkets heavily engaged in a food price war and oil prices down markedly.
“Given the current weakness of oil prices, consumer price inflation could very well dip further towards 1 per cent in the near term.”
He expects inflation to hover around 1.5 per cent during the early months of 2015 before gradually heading up towards 2 per cent by the end of next year.
Further improvements in the labour market should see the headline unemployment rate falling to around 6 per cent this week, a whole percentage point below the level at which the Bank of England said it would consider raising interest rates when it first tried its hand at “forward guidance” last summer.
However, it has since become apparent that enough “slack” remains in the workforce to keep employees’ bargaining power in check.
IHS forecasts that total average earnings will be found to have risen by 0.8 per cent year-on-year in the three months to August.
Archer said: “We expect earnings growth to gradually trend up over the coming months, with the gains accelerating as 2015 progresses, as sustained decent economic growth, narrowing slack in the labour market and relative optimism in the outlook causes a growing number of employers to lift pay.”
How earnings develop over the coming months will play a crucial role in when the Bank of England starts to raise interest rates, and how quickly they move following an initial hike. Archer believes most monetary policy committee (MPC) members want to see concrete evidence that pay is starting to pick up before raising interest rates.
Gerard Lane, economics expert at Shore Capital, believes that ongoing low inflation and pay growth, among other factors, mean the first rate rise is much further away than many expect.
“There’s no wage inflation, and the reason for that is there’s no labour capacity issue,” he said.
Lane points out that jobs are being created in low-wage sectors, while an influx of migrants and moves to get people off benefits mean labour is easily available.
He said: “I don’t see any need for interest rate rises. I think people will be surprised to find that the next move by the MPC is an easing.”
Lane expects that move to be an easing on the mortgage rules imposed by the bank earlier this year, which have led to a marked cooling in the housing market.