Outlook for real pay continues to brighten

Households are continuing to see substantial increases in their purchasing power. Annual growth in average weekly earnings (excluding bonuses) picked up from 2.7% in April to 2.8% in May, well above the near zero rate of CPI inflation. What’s more, survey measures suggest that pay growth should remain strong in the near term. And the UK is now on track to experience another short period of “good” deflation, given the fall-back in the oil price and the forthcoming cut to gas prices. Granted, households face a re-intensification of the fiscal squeeze. But they look better placed to deal with another bout of austerity than they did in 2010. And renewed fiscal consolidation underlines that interest rates are going nowhere fast. Accordingly, we remain optimistic about the prospects for the consumer recovery in the second half of this year.