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Analysis

Inflation squeezes UK wages faster than expected

by Luke Lythgoe | 14.06.2017

This week has seen an onslaught of bad news for the UK economy. Monday brought a barrage of negative reports about business confidence and consumer spending; on Tuesday the government said inflation had reached a near four-year high; and figures today show workers’ wages after inflation shrinking at the fastest pace since 2014. The full economic impact of Brexit is still to come, yet consumers’ real incomes are already being squeezed faster than expected. Politicians plotting our future relations with the EU need to take note.

Inflation in the year to May was 2.9%, rising from 2.7% in April. The weakness of the pound following the Brexit vote has pushed up the price of imported goods, with culprits including foreign package holidays, imported computer games, sugar, jam and children’s clothing.

But wages haven’t kept pace. Total earnings including bonuses after taking inflation into account fell by an annual 0.4% in the three months to April. This is the biggest real-terms drop since the three months to September 2014.

The labour market remains resilient, with the unemployment rate unchanged last month at 4.6%. However, Barclays expects the number of those out of work to stay broadly stable in the short run and then gradually rise towards 5.1% by the end of 2018 due to “the slowing of the economy and elevated Brexit uncertainties”.

In light of these figures and the hung parliament, the government ought to adopt Brexit policies with the nation’s best economic interests at heart and ditch its dogmatic pursuit of sovereignty and low immigration figures. Theresa May’s political weakness means she must now listen to opposing voices, raising the chances of a change in direction.

We should know more after Philip Hammond’s Mansion House speech alongside Bank of England Governor Mark Carney on Thursday. Presumed to be for the chop before the election, the chancellor has reportedly begun to demand a more moderate, business-friendly Brexit from May. Business leaders, allegedly shut out of Downing Street during the prime minister’s first months in office, have also used the hung parliament as an opportunity to exert more influence – even calling for a cross-party commission to lead the Brexit negotiations.

May will now be under pressure from all sides to deliver a Brexit that works for companies and households, not just the hard-Brexit ideologues closest to her. The worrying signs in the economy will make this pressure hard to ignore.

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Edited by Alan Wheatley