UK inflation has soared. Next Wednesday’s figures could show that consumer price index (CPI) inflation jumped to over 8 per cent in April – its highest since 1991 – due largely to a huge rise in gas and electricity prices.
Inflation is not confined to consumer prices, however; producer price inflation for both output and input prices the same day will also increase thanks mainly to higher raw materials costs. Nor of course is it confined to the UK; official eurozone data the same day will confirm that CPI inflation in the region is 7.5 per cent.
Wages, however, are not keeping pace with prices. Tuesday’s figures will show that median monthly pay has risen by around 6 per cent in the last 12 months, while average weekly earnings are up around 5.5 per cent. The latter will be inflated by City bonuses. For many people, such as in construction or the public sector, pay growth is even weaker than this. Wages, then, are falling in real terms – and for many workers, by a lot.
This isn’t just because of the squeeze on public sector pay. It’s also because demand for labour is not strong. Granted, a superficial reading of Tuesday’s figures might suggest otherwise: the headline unemployment rate could fall to 3.7 per cent, its lowest since 1974. But this would in part reflect a shrinking labour force. Total hours worked – a better guide to demand for labour – are likely to remain below their pre-pandemic levels.
The impact of falling real wages will be evident in Friday’s numbers. GfK is likely to say that consumer confidence has fallen sharply recently, perhaps to even below the levels we saw during the financial crisis. And while official figures could show that April’s nice weather helped retail sales recover from March’s fall, they’ll confirm that sales are well down since the autumn and winter. It’s not just households that are being squeezed: so too are retailers.
One big uncertainty is what this means for inflation in coming months. It should fall as last years’ petrol price rises drop out of the data, but will weak demand depress prices by more than higher costs push them up? High inflation creates uncertainty; this time is no different.
In the US, official figures should show small rises in both retail sales and industrial production in April, fuelling economists’ hopes that the drop in GDP in the first quarter was just a blip. Surveys by the New York and Philadelphia Feds, however, could show falls in companies’ optimism as a result of rising interest rates and (in many cases) squeezes on profit margins.
