So the household spending squeeze is starting to ease at last, but not quite in the way that the experts had predicted. The forecasts had been that earnings growth would hit 3% while the CPI measure of inflation would stick at 2.7%.
Expectations were high on Tuesday morning as the City waited for the release of the ONS’s latest wage figures which were widely expected to show that earnings growth was finally going to overtake inflation.
The pound, which had closed Monday on its second-highest high against the dollar since the Brexit vote, moved up to a high of $1.437.
And then the figures were released and things went a bit flat. Rather than the 3% increase that had widely been expected, it turned out that wage growth for the three months to February had held steady at 2.8%.
So wages were rising faster than inflation for the first time since the beginning of last year, but only just. Chances of an interest rate rise next month lessened and the pound fell a bit from its high.
Inflation springs a surprise
But then the inflation figure on Wednesday turned out to be a surprise as well, falling to 2.5%. It was helped by lower rises in clothing prices and the Budget moving to the autumn and taking its usual rise in alcohol and tobacco prices with it.
With a decrease in the rate for the second month in a row the Brexit effect on prices is finally starting to wane.
On the inflation news the pound fell further from Tuesday’s high to below $1.42.
Will the MPC raise rates in May?
Opinion was divided over what effect the more sluggish than expected earnings growth and lower than expected inflation figure would have on interest rates when the Bank of England’s Monetary Policy Committee next meets on 10 May.
Howard Archer, chief economist advisor to the EY ITEM Club said the wage data was likely to keep the Bank of England on track to hike interest rates to 0.75% in May.
He said while the inflation figures were certainly “food for thought” for the MPC he still predicted a rate hike next month.