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We are still waiting for wages to rise

  • Thursday, December 28, 2017

Mark Carney Governor of the Bank of EnglandThe number of people out of work fell to 1.4 million in Q3 leaving the jobless rate at 4.3%. UK unemployment is at a 42 year low and may fall further. There are 32.1 million people in work in the UK which is 279,000 more than in 2016. Job vacancies still remain significant with over 780,000 advertised vacancies suggesting that employers are still looking for staff and unemployment is unlikely to rise. Many parts of the UK are effectively fully employed so wages growth is likely to follow.

The Office of National Statistics (ONS) confirmed that inflation is currently running ahead of wage growth by 0.5% year on year. Inflation averaged 2.8% while wage increases have averaged 2.2% throughout 2017.

Wage inflation while employment is at a record high has not yet followed through mainly due to the gig economy, self-employment rates and falling productivity for every hour worked. Spending habits are linked to economic growth as household expenditure accounts for 60% of UK economic activity.

Inflation hit 3.1% in November which is a five year high and well above the BoE 2% target. One of the factors was the global demand for Brent Crude Oil taking prices to US$59pb up 20% on 2016. This rise in oil price will feed through to prices on food, transport and manufacturing. The NIESR have suggested a ‘no deal’ Brexit risks adding around 1% to the UK’s inflation if WTO tariffs are applied to imported goods.

For the first time in over 10 years, the BoE have raised interest rates from 0.25% to 0.5%. While the rise is modest and only reverses the cut made in August 2016 after the Brexit Referendum, it will still impact on variable interest rate mortgage holders but help savers. The Bank chose to raise interest rates as a result of rising inflation, stronger global growth and record low unemployment in the UK. While there is no strong expectation of another rise in the near future, markets are expecting another two more over the next 3 years.

The Governor of the Bank of England Mark Carney has said that Brexit related constraints on investment and workers coming to the UK are appearing to be holding back growth in the economy. The BoE also suggests that the weaker GB£ has driven up the cost of imported food, fuel and other goods but inflationary pressure is at its peak.

The interest rate increase was a boost of confidence in the economy. Ultra-low rates have benefited business borrowing and mortgage holders but have hurt savers and pension funds particularly those funds needing to match their assets to their long-term liabilities. Bond yields have, on the back of low interest rates and central government purchasing, become extraordinary low creating an asset price bubble in bond values. Raising interest rates gradually will ease this asset bubble rather than pop it.

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Chris Davies

Chris Davies

Chartered Financial Adviser

Chris is a Chartered Independent Financial Adviser and leads the investment team.

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