Real pay to fall for longer

Recent developments have darkened the outlook for inflation and therefore imply that the squeeze on real pay is likely to persist to the very end of 2013. The recent rise in oil prices suggests that petrol prices will rise by around 3% in February. And the pound’s recent depreciation, if sustained, points to import price inflation returning to positive rates later this year. These developments have therefore made it more likely that CPI inflation peaks above 3% in the summer months. Meanwhile, the latest figures show that pay growth is continuing to weaken and surveys indicate no imminent improvement. As a result, the chances of a sustained recovery in real household spending this year remain slim.