David Blanchflower

Professor of economics at Dartmouth College, New Hampshire, and member of the Bank’s monetary policy committee from June 2006 to May 2009

This month the big economic story is all about declining real wage growth. Wages have been growing at around 2% for the last three years or so, although the exact rate depends on what measure is used. The best indicator is probably pay settlements, which XpertHR have shown have not been as high as 3% for eight years and have not moved from 2% for three years.

When inflation fell below 2% as it did in 2015 and 2016, that meant that real wages were on the rise. Real wages matter because that impacts living standards and what workers can buy. Prices rising less than wages = good; prices rising more than wages = bad.

That has reversed itself this month. Inflation has been rising since the Brexit vote as the pound’s sharp drop makes imports to the UK, such as food ingredients and fuel, more expensive. A rise in crude oil prices has also added to the upward pressure on inflation and last month it hit 2.7%, higher than economists had been expecting and well above the Bank of England’s target for inflation at 2.0%. It was the highest inflation rate since September 2013, pushed up in part by higher air fares for Easter and also rising prices for clothing, vehicle excise duty and electricity. I fully expect that inflation will continue its inexorable rise during 2017.

Even though unemployment was better than forecast, official data confirmed pay growth failed to keep pace with inflation in the opening three months of 2017 and so wages were falling in real terms. Excluding bonuses, average earnings were up 2.1% year on year, missing economists’ forecasts for a 2.2% rise. Once adjusted for inflation, regular pay fell 0.2% in the three months to March. Pay awards are also settling in below the rate of retail prices index (RPI) inflation. With RPI at 3.5% in April 2017, we now see the largest negative gap between the two indicators since December 2011.

Regular weekly pay, excluding bonuses, adjusting for prices were £465 a week in March 2017 according to the Office for National Statistics. This contrasts with £472 a week in March 2007 before the start of the great recession. So pay packets buy less than they did a decade ago. Retail sales defied economists’ expectations in April and rose at the fastest pace for more than a year, in large part due to the warm weather but companies are expecting spending to ease off in May. Workers are being punished by Brexit.

Andrew Sentance

Senior economic adviser at the PwC consultancy and member of the Bank’s MPC from October 2006 to May 2011

This month’s economic data paints a picture broadly consistent with the pattern which has been emerging over the course of this year.

CPI inflation has risen further to 2.7% – its highest level since the autumn of 2013, and prices are now rising faster than wages. The resulting squeeze on real wages is contributing to the slowdown on the consumer side of the economy.

We should be cautious about reading too much into the bounce-back in retail sales in April. The pattern of retail sales in March and April is very sensitive to the timing of Easter and weather effects, so it makes sense to look at spending patterns over a number of months. The volume of retail spending in the past three months is just 0.3% up on the previous three months – representing an annual growth rate of just over 1%. This is very subdued growth in the retail sector – it compares with an average of 4.4% annual increase in spending over the three years 2014-16.

There has been more positive news on the jobs front – with the unemployment rate dropping to 4.6%, the lowest since 1975. Employment growth appears to be picking up again after a slowdown in the second half of last year. The numbers in employment were up by over 120,000 in the first quarter of this year – the biggest quarterly increase since the EU referendum. Construction and private services are the main sectors generating jobs in the UK currently – while employment is flatlining in manufacturing and the public sector.

Meanwhile, the vacancy rate also points to a pickup in the demand for labour. The number of unfilled vacancies has risen to its highest level since the current data series started in 2001.

Taking all this data together, it is generally consistent with the slowdown in economic growth which is expected by most economic forecasters this year and next. Despite this, optimism about global prospects plus a decline in the value of the pound against the euro has helped to push up the UK stock market, with the FTSE 100 hitting a record high in the middle of last week.