Economic Update: inflation up, real earnings down

Although our recent economic updates have shown the economy performing well, there was less positive news over the past month. The month saw inflation rising quicker than earnings, a decrease in productivity and a slight downward revision in economic growth for the first quarter of 2017.

Inflation rose at a faster rate than earnings

The trend of rising employment and falling unemployment continued in the three months to April 2017. The employment rate reached its highest level since comparable records began in 1971, and the unemployment rate was at its lowest rate since 1975. However, the positive news in terms of employment growth has not led to positive news in terms of earnings.

Over the last year, wage growth, measured as the increase from the previous year, has generally been between 2 and 2.5%. Throughout 2016, the growth in wages was above inflation which was between 0 and 1% for most of this year.

The first few months of 2017, however, have seen a steady increase in inflation. In February, for the first time since autumn 2014, inflation increased to a higher level than wage growth. A further increase in inflation, and a slight decrease in wage growth means that, after adjusting for inflation, average earnings decreased by 0.4% in the three months to April 2017 compared to the previous year.

Since then CPI inflation rate has risen to 2.9% in May, its highest rate since June 2013.

Consumer spending and economic growth

At the end of May, GDP growth in the first quarter of 2017 was slightly revised downwards to 0.2%, from a preliminary estimate of 0.3%. This was the slowest rate of quarterly growth for a year.

The drop in real wages has led to a reduction in the purchasing power of households and a slowdown in consumer spending. This is already evident with the drop in GDP growth in the first quarter of 2017 and the lowest annual growth rate in the volume of retail sales in the three months to May since 2013. With consumers’ income likely to continue to be squeezed in coming months, GDP growth may remain under pressure.

Productivity continues to be a problem

While other parts of the economy have been improving since the recession, productivity continues to be an exception. In the nine years since the recession began, productivity has stagnated with only small changes in the productivity level over the last five years.

Provisional estimates for the first quarter of 2017 suggest this particular issue will not be resolved in the short term with a decrease in productivity from the last quarter of 2016 and only a small increase from the year before.

This article was originally published in the June edition of the Library’s Economic Indicators paper. The monthly publication provides a snapshot of key economic data covering: growth, labour market, finance, borrowing, trade, exchange rates, business, retail and housing. Individual pages are updated through the month as new data come out.