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.
Samuel Tombs, chief UK economist Pantheon Macroeconomics reckoned that the MPC would be inclined to wait.
He said: “We still expect the MPC to raise Bank Rate by 25bp just once this year and think the Committee will wait until August to hike, due to undershooting activity and inflation data.”
He said investors had concluded too hastily that a May hike was a done deal: “The boost to inflation from sterling’s depreciation is fading much more swiftly than the Committee anticipated.”
Others saying that the Bank of England should hold off interest rate rises included the TUC and the British Chambers of Commerce
High street blues
Consumers still seem to be cautious with discretionary spending and are not splashing out on the high street. Recently released figures from the BRC show that shop footfall in March suffered a year-on-year fall of 6% -the sharpest decline for more than seven years.
While research from the Local Data Centre highlights that last year new store openings on were at their lowest for seven years. And as more existing stores closed than new ones opened, there was a net decrease of 1,772 outlets. Clothing stores were particularly badly hit.
CVAs continue to be in fashion for retailers and restaurants, with Mothercare likely to be the next to seek an arrangement with its landlords to slash rent to stay in business. Others to have gone down this route include Byron, Prezzo and Jamie’s.
London house prices down
And it is not just on the high street where consumers have cut back on spending. Figures released by the ONS today show that average house prices in London fell by 1% in the year to February.
This is the lowest annual growth in London house prices for nearly nine years when September 2009 saw a fall in prices of 3.2%.
Only the start
One month of wages rising faster than inflation does not suddenly make consumers feel rich. Inflation has been rising faster than wages since the beginning of 2017 and many people have suffered below inflation pay rises for some time longer than that.