UK Wage Growth Behind Inflation – A Temporary Thing, Brexit And Pound Related – Forbes

Wage growth in Britain has fallen behind inflation. This is not the sort of thing we want to be happening of course, our aim in having one of these economy things is that John and Joan Smith steadily become richer over time. This means that we want nominal wage growth to be above the inflation rate, thus real wages to be rising. We also know that some variation of this capitalism and free markets mix–pretty much any variation of it in fact–is the only socio-economic system which has ever provided this. No other system humans have ever tried has managed substantial, sustained and widespread such increases in real wages. So, Hurrah! for free market capitalism then.

However, it doesn’t always work over short periods of time. And that’s what we’ve got here. Inflation is higher than nominal wage growth meaning that real wages are falling:

Real wage growth in the UK economy turned negative in the first quarter of the year, as economists warn higher inflation will further pinch spending in a slowing economy.

As above, this isn’t what we want to be happening and it’s not the purpose of our economy either. But it is happening:

Even as unemployment dropped to its lowest in more than four decades last quarter, U.K. workers saw their real earnings fall for the first time in 2 1/2 years, data from the Office for National Statistics showed on Wednesday. That’s particularly problematic for a nation that has relied on buoyant consumers to keep spending, not least as it enters negotiations to leave the world’s largest trading bloc.

At which point we want to work out why it’s happening. Is this some disastrous problem with the underlying economy? Or some passing problem which contains the seeds of its own solution?

Average weekly earnings excluding bonuses increased by 2.1%. in the three months to March, while inflation rose by 2.3% in the year to March 2017.
In the first three months of this year, wages fell by 0.2%.

Nominal wage growth is just fine there. It’s the inflation number that means real wages aren’t doing well. So, our concern is, well, what’s causing the inflation?

The BOE is watching closely for signs of a pick-up in wages that could add to inflation which seems to be heading for around 3 percent due to the fall in the value of the pound since the Brexit referendum and as oil prices rise.

So far the central bank believes there is little pressure on most employers to raise pay sharply which could feed a more permanent inflation problem.

Ahhh, it’s something we don’t want nor like but it’s not a major problem.

Think of it this way. Imagine that there was something wrong with the British economy–OK, there’s always something or other wrong with any economy but majorly, bigly, wrong–which meant that we had 2 and 3% inflation just baked into the economy for the foreseeable future. That would mean that real wages are likely to continue to decline and that would not be, as already said, a Good Thing. Now think of it a little differently. Britain imports some amount of its current consumption. Brexit has meant that the pound has fallen in value. That makes those imports more expensive. That also, given that this is what inflation is, means that the inflation rate goes up. Again, we don’t like this. But for the inflation rate to stay high the pound has to keep falling. Which it isn’t, at all. At worst it has fallen and stayed down. Although, actually, it has risen a bit again. We’re seeing that change in prices work through the economy, but it’s a once off change, not a continuous process.

So, what happens to the inflation number now is that those rises in import prices are in the inflation numbers for 12 months. Then, because we measure it over a one year period, the fall in the pound drops out of our inflation calculation. Then, nominal wages continue to rise at 2 and 3 %, no reason why they shouldn’t with unemployment where it is. But import driven inflation stops and thus real wages begin to climb again.

The full Office for National Statistics reports and numbers are available here.

We don’t like that real wages are falling, not at all. But the inflation is import and Brexit driven through the value of the pound and that’s a transient problem. Real wages should climb again next year therefore.

UK Wage Growth Behind Inflation – A Temporary Thing, Brexit And Pound Related – Forbes