UK inflation and average earnings diverging: good or bad?

This week was always going to be an interesting week for UK investors, is the path set out even before Thursday?

UK inflation and average earnings diverging: good or bad?

Yesterday saw an unexpected increase in consumer price index, increasing from 2.6% in the previous month to 2.9%, where the median forecast was 2.8%. This caused the pound to rally through its previous highs of 1.3268 and reach levels we have not seen since almost to the day this point last year.

This increase puts pressure on the Bank of England (BoE) to think about raising interest rates sooner rather than later.

Average earnings

Today we saw a lower than expected average weekly earnings report. The median expectation was for an increase on the previous month to 2.3%, however it stabilised at the same level of 2.1%.

With earnings slower than inflation, obvious concerns begin to arise. The money we earn is having less purchasing power. So how does the BoE address this? Increasing rates will slow down inflation but it will also take money out of the pockets of consumers.

Inflation Vs Average Earnings

Carney Vs Inflation

Carney has always been clear about his stance on the inflation rate. He attributes it to the significant decrease in value of the pound sterling. This sudden drop in value has hit importers hard. Everything they import has suddenly become a lot more expensive, and this was felt in yesterdays inflation readings, with the price of clothes being a major factor in the inflation increase.

This below expected earnings figure gives Carney more backing for his strategy because the lower earnings should begin to sort out the inflation rate itself. With people having less disposable income, you would expect less spending, which in turn will affect the inflation rate.

Dud Thursday?

Given that, the chances of the BoE increasing rates tomorrow I would say is very slim. Given the stumbling blocks we are witnessing in the Brexit negotiations, I'd imagine that the BoE do not think we have seen the full force of Brexit yet and do not want to strangle the economy whilst in this precarious state.

BoE expected inflation to hit 3% by October, so it all appears to be in hand for the moment. Tomorrow it will be important to watch the vote but even if we see a hawk cross over, I am unsure how that will affect the longer term plan with Brexit in mind.

As of 11:17 BST, Wednesday, 13 September, GBP/USD share price is 1.3117.

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