UK Stronger earnings data and inflation

UK April weekly earnings data reported a better than expected 2.7% 3m y/y rise. This was the strongest increase since early 2009, which suggested that despite pay freezes in some industries that almost 90% of Q1 UK pay awards were in the region of 2 to 3.99%. Higher wage deals raise the likelihood of demand led inflation re-appearing and hawks such as Weale could argue that a rate hike in the coming months could be necessary to prevent CPI inflation pushing above its 2% target medium-term. That said, a number of counter arguments remain. The first is centred on the persistent weakness of productivity in the UK labour force, notes Rabobank.

Currently the UK economy appears to be experiencing a combination of weak productivity growth, strong wage growth and weak CPI inflation. This is unsustainable. Without a rise in productivity or inflation it is likely that pay increases will naturally be capped. UK CPI inflation is on course to rise towards the end of this year as the oil price collapse falls out of the index. However, in turn this will eat into workers' disposable incomes and counter any real wage increase. For real wages and living standards to rise over the medium-term, productivity levels have to improve. There are some signs of improvement. Productivity in the UK, as measured by output per hour, rose by 1.3% in the year to the end of March, this was the fastest rate of growth since the start of 2012. However, productivity was still 1% lower on average in Q1 2015 compared with the same period in 2008 suggesting that the UK labour market still has a way to go before returning to full strength, says  Rabobank.