Rising inflation could halt wage growth boom

Bank of England governor Mark Carney (Picture: Anthony Devlin/PA Wire)
Bank of England governor Mark Carney (Picture: Anthony Devlin/PA Wire)
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Inflation is expected to have returned in the UK in May, ending a brief period of falling prices.

The Consumer Price Index (CPI) fell to -0.1 per cent in April, the first time it has turned negative in more than 50 years.

But figures for last month, to be published by the Office for National Statistics (ONS) on Tuesday, are expected to show its turned positive again.

It comes as research revealed low prices helped real wages rise at their fastest rate in eight years.

The Resolution Foundation said average weekly earnings growth jumped to an annual rate of 2.5-2.6 per cent between February and April, compared to 2.2 per cent in January to March.

Combined with negative inflation, real wages rose by 2.5 to 2.7 per cent, the fastest rate since October 2007, the think-tank said.

Experts have estimated CPI will have climbed to between 0.1 per cent and 0.3 per cent.

It would mark the first rise in consumer prices since October last year.

Inflation has been on a broadly downward trend since reaching 2.9 per cent in June 2013.

It fell to zero in February and March this year before turning negative in April.

Prices have been held down by the supermarket price war and the lower cost of petrol amid a plunge in the world oil price.

Howard Archer, chief UK and European economist at IHS Global Insight, said inflation is likely to have hit 0.1 per cent in May, partly due to rising petrol prices.

“Consumer price inflation is likely to hover close to zero through the summer and then start heading up from the autumn,” he added.

Consultancy Capital Economics is pencilling in CPI of 0.3 per cent for last month.

Vicky Redwood, its chief UK economist, said while the risk of prolonged low inflation has not “suddenly disappeared”, the chances of it happening are low.

The Bank of England has said it expects CPI to pick up “notably” towards the end of this year as the effect of lower oil and food prices fades.

In February, BoE governor Mark Carney predicted inflation would turn negative before the effects of the sharp drop in energy prices fall out of the annual rate later this year.

That month, BoE Monetary Policy Committee member Kristin Forbes told The Yorkshire Post inflation would rise as wage increases feed through to the wider economy.

A lack of wage growth had been “the key piece missing” from the UK’s recovery, Ms Forbes said.

Official figures on wage growth will be published on Wednesday.

The Resolution Foundation study said earnings in the private sector increased to 3.0 to 3.2 per cent in February to April, the highest real-terms growth since September 2007.

However, it expects real wage growth to level out in May if inflation edges up.

Chief economist Matthew Whittaker said while it is good news wages are on the up, it appears to be driven by “inflation falling to unprecedented levels”.

He said: “Normally we’d have expected wages to grow at this rate far earlier on in a recovery, so there is an enormous amount of ground to make up.”

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While the UK economy continues to strengthen, increasing uncertainty looms ahead of the Government’s promised EU referendum.

Credit rating agency Standard & Poor’s warned the UK could lose its AAA rating should there be signs of an impending Brexit.

S&P, which is the only major agency to maintain Britain’s top-notch rating, said the EU vote “represents a risk to growth prospects for the UK’s financial services and export sectors, as well as the wider economy”.

Meanwhile, some of the largest fund managers in the City are making contingency plans for relocation should the UK vote to leave Europe, the Sunday Times reported.