UK spending power to surge to 13-yr high with prices frozen

OCT 10, 201512:22 AM

[LONDON] As household-spending power surges toward a 13-year high, economists predict the boom for consumers may be short lived.

The UK Office for National Statistics will say Wednesday that average weekly earnings excluding bonuses climbed an annual 3 per cent the three months through August, according to a Bloomberg survey of economists. Annual consumer price inflation was zero in August and a separate report on Tuesday will probably show the rate remained frozen in September. The gap of 3 percentage points would be the largest since July 2002.

"Pay growth is probably one of the brighter sort of stars in the economic sky," said David Tinsley, an economist at UBS in London. "You've got this very sweet spot now, where you've got regular pay growth growing in excess of 3 per cent, and inflation at zero - so I'd imagine real-wage growth, in other words, will come down over the next 6 months."

According research from Bloomberg Intelligence, consumer price growth is set to pick up rapidly at the turn of the year and, unless pay growth keeps pace, will erode real wages.

"Inflation is going to start shooting up in February," said Dan Hanson, a UK economist at Bloomberg Intelligence. "So for the recent growth in purchasing power to be maintained wages have to keep gathering pace." The labor market is a key metric for policy makers as they inch closer to lifting rates from a record low. The strength of wage gains has been a factor prompting Ian McCafferty to call for an increase in the benchmark. Any signs of a slowdown in real pay would underscore the case for keeping the rate at 0.5 per cent.

Analysis by Hanson and Jamie Murray shows that as base effects of lower oil prices start to fall out, inflation will accelerate to 1 per cent in January and 1.1 per cent in February.

So as BOE Governor Mark Carney remarked earlier this year, Brits should enjoy the fillip from low inflation while it lasts.

BLOOMBERG