With average annual earnings failing to keep pace with inflation for several months now, the Bank of England has a dilemma on its hands: does it raise interest rates to lessen the burden on UK households, and with that risk putting the brakes on economic growth?
Creeping up from 2.1% in July, the 2.2% earnings growth in August still left average annual wage growth trailing inflation by 0.8 percentage points, as consumer inflation in September rose to 3% from 2.9% in August.
What will the Bank of England's monetary policy committee do in response? Some have suggested it will bear the rise in inflation as economic growth has seen a couple of months of rather limp data. But can it let the squeeze on household spending continue, and risk a consumer-led slowdown in growth?
The analysts say . . .
Capital Economics - Andrew Wishart: "We continue to think that the Committee will follow through with its pledge to raise interest rates 'over the coming months' and think that the first 25bp hike will come in November.
"Moreover, if we are right in thinking that average earnings growth will pick up more momentum next year, then we envisage three further hikes in 2018."
Pantheon Macroeconomics - Samuel Tombs: "Month-to-month gains in wages are volatile, and year-over-year growth still is only matching the 2.25% rate anticipated by the MPC in August’s Inflation Report.
"The recent fall in consumer confidence, meanwhile, likely will mean that fewer workers quit for new positions, easing the pressure on employers to pay staff more to retain them. Accordingly, we doubt that August’s uptick in wages is the start of a stronger trend, but it might be the last straw for some members of the MPC itching to raise rates."
Berenberg - Kallum Pickering: "In our view, the BoE’s likely path of a gradually tightening over the medium-term, with the first hike coming next month, is consistent with achieving its remit of 2% inflation, even in a somewhat sluggish wage growth world.
"Keep in mind that even with a modest tightening cycle, say of 100bps between now and 2019 (our base case), the real policy rate would remain negative and the bank’s balance sheet large by historical standards.
"Monetary policy would remain highly accommodative well into the medium-term."
OFX - Hamish Muress: "“The Bank of England has been rather fortunate this morning. The gap between inflation and wage growth has remained steady at 0.8%, meaning a future rise in interest rates will put slightly less pressure on consumers. Had wage growth figures missed their forecast, the BoE may have found itself in a difficult situation, stuck between high inflation levels and falling real wages.
“This is the last significant data release between November 2nd and the Bank of England’s next meeting. As such, it appears that everything is now in place for an interest rate hike, the likelihood of which is becoming more and more certain.”
Indeed Jobs - Mariano Mamertino: "With the gap between wage and price rises steadily turning into a gulf, ever more workers are seeing their living standards be steadily eroded.
“With consumer prices now rising at 3% a year, real wages are set to fall faster and harder. The resulting pain for workers will soon translate into reduced consumer spending and could morph into a serious threat for the economy.
“While Britain’s unemployment success story means more people are in work than ever before, it is increasingly looking like a distraction from the clear and present danger posed by falling real wages.”
City Index - Kathleen Brooks: "The prospect of raising interest rates when real wages are in negative territory will make this potential hike a tricky one for the BoE to justify.
"If you hike rates now you could put extra pressure on the consumer and a sharp break on the economy as we move into the end of the year. Although the market is convinced about a rate hike next month, there is still an element of doubt and the BoE may yet surprise us."
ING - James Smith: "We think its probably too early to say this is the start of a more rapid upward trend and crunching the numbers, we don't expect wage growth to go much above 2.1/2.2% before next summer.
"So whilst we expect headline inflation to peak at 3.1% next month, the gap between CPI and wage growth is likely to stay fairly wide for some time to come. This will keep a lid on consumer spending and we may see some further evidence of this in tomorrow's retail sales report, as households continue to take a cautious approach to discretionary spending.
"So what does this mean for interest rates? Whilst we expect a November hike from the Bank of England - the committee is keen to get out of emergency mode - all of this suggests that the amount of subsequent tightening from the Bank will be limited."