Real pay recovery finally gets underway

At last, the UK’s real wage squeeze appears to be over. Annual growth in average weekly earnings excluding bonuses picked up from 1.2% to 1.8% in September and so exceeded the same month’s CPI inflation rate (of 1.2%) for the first time in five years. And this recovery should gather momentum over the coming months. October’s 3% rise in the national minimum wage should have provided an immediate boost to wages, while business surveys point to a further strengthening in pay growth in response to the decline in the amount of slack in the labour market and recent modest rises in productivity. Meanwhile, the sharp fall in oil prices and the absence of any energy price hikes this winter suggests that CPI inflation will fall below 1% shortly and is likely to remain subdued in 2015. As a result, we doubt that the recovery in household spending or overall GDP is about to suddenly lose pace.