Negative real wage growth a warning sign that all’s not well
Data yesterday confirmed that real wages shrank further in the UK, with average earnings rising 1.7% against an inflation rate of 2.9%. Such a pinch in purchasing power will become more evident in spending patterns, retail sales, saving rates and, potentially, GDP figures later this year.
The last time the pay squeeze in the UK was this severe was in the wake of the financial crisis, where inflation outstripped earnings growth by as much as 4 percentage points and the corresponding economic conditions were woeful. To tie this all to exchange rates and the weaker pound would be naïve; there are serious flaws in the current UK labour market and an unemployment rate this low with earnings growth so weak suggests underemployment, dissatisfied workers and resource misallocation.
Fed look through near-term price weakness
While inflation roared in the UK earlier this week, it’s doing the opposite in the consumer price inflation in the States, which fell to two-year lows yesterday and was well below economists’ expectations. And yet, the Federal Reserve is raising interest rates and the Bank of England is cutting them.
These counter-intuitive policies show not only the fickle nature of global economics, but also the limitations of central bank policy. While they hold probably the most powerful economic tools available, their influence ebbs and flows when corporate behaviour and consumer confidence moves against them.
The dollar was trading heavy heading into the FOMC decision and the 25bps hike, allied with Yellen’s press conference, managed to pull the currency back to flat on the day. The Fed has taken a somewhat relaxed approach to hiking rates and what it expects to see as a response in macroeconomic data.
By recommending that markets don’t get too worked up over single data points, quick changes in trend or one-off fluctuations, she’s indicating the Fed is looking far beyond this month’s numbers and further into the future. The Fed’s belief is that there’s no use focusing on the near term when the job market’s current hot streak will be stoking inflation further down the line.
Bank of England expected to sit on its laurels
Looking at overall economic conditions in the UK, there’s been relatively little material change since May (the last time the Bank met) and as such, any change in policy is unwarranted. So, a 7-1 vote split is the market’s expectation (with the ninth space on the MPC still empty after Charlotte Hogg’s departure).
Today’s Bank of England announcement shouldn’t prove to be too market moving, with more focus on this morning’s 0930 BST retail sales number which, given poor consumer metrics earlier in the week and a recent overreliance on consumer credit, has the scope to be another disappointment.