Families staring at hard times ahead as wage rises fail to keep up with inflation

The official inflation figures were pretty much what we were expecting, so it was no surprise. We knew we had the first of the “Big Six” utility companies price rises in August and we now have more coming in September and October.

We are expecting inflation to go beyond 5 per cent in September and October – it is yet to peak, although we do not expect it to go much higher than that. However, a lot depends on what the price of oil does and if food costs iron themselves out.

The question is, to what extent can consumers try to regain their pricing power through interest rate increases? And the answer is they cannot. Wages are just not keeping up with inflation. Wage inflation is currently running at about 2 to 2.5 per cent, while consumer price index (CPI) inflation is now at 4.5 per cent.

People now are talking about household living standards being at their lowest for about 30 to 40 years and this is because of the discrepancy between wages and the cost of living.

Most consumers are seeing a lack of purchasing power as people’s spending is being directed towards utilities and fuel rather than on to the high street.

This is unusual in economic history – you do not usually get this situation for a long period of time.

In the 1980s, which is the last time that inflation was this high, wages rose more in line with the cost of living.

This time around, we are also coming out of recession – but people are less unionised and also companies tried to keep workers on by cutting their working hours – for example, to four or three days a week, so the average wage is lower.

As the pressure on inflation eases, it is possible that we might see a large push for pay rises from people in the private sector. That is possible in some areas, especially those where there are skills shortages such as the IT industry, where there is already wage inflation of around 5 to 8 per cent.

Also, people on benefits may find they are slightly better off than they expected due to low bank rates as September is the time that the government reassesses benefits.

So, there might be a few people who are getting some purchasing power back, although we are trying to find any sliver of hope in this cloud.

We have to remember that 1.5 percentage points of inflation is due to the VAT rise in January this year and that drops out next year.

As that follows through, we should go back to 3 per cent early next year, so we should see some easing of the inflation pressures.

l Tom Vosa is chief economist for Clydesdale Bank.