The cost of living in the UK is continuing to ease as starting salaries for permanent workers surged in March, growing at the sharpest rate since July 2007, according to the EY ITEM Club.
They believe low inflation and a strong pound will keep an interest rate rise on hold until the end of 2015. Inflation, as measured by the Consumer Price Index (CPI), is set to stay below 2 percent through 2014-2016 thanks to several factors. The growing workforce, supplemented by ongoing immigration and government payroll cuts, will help to hold wage rises down. The relatively strong pound will limit import costs, while industry will also benefit from subdued energy and commodity prices, as the Chinese economy rebalances from investment to consumption. In addition, higher business investment in the UK will revive productivity and help keep businesses’ costs under control.
Chancellor George Osborne, speaking on the statistics, argued that the figures on inflation combined with the reality that wage growth is beginning to surpass it is clear evidence that the government has succeeded with its policies to improve and turn around the economy. “These latest inflation numbers are welcome news for families. Lower inflation and rising job numbers show our long term plan is working, and bringing greater economic security. However, there is still much more we need to do to build the resilient economy I spoke of at the budget.”
EY ITEM Club suggested that with business confidence indicators hitting record highs, and capacity and staff shortages intensifying, business investment would rebound, boosting productivity and real growth in wages. After falling 0.6 per cent in 2013, fixed investment is set to surge by 9 percent in 2014, before decelerating slightly year-on-year to 7.3 per cent in 2017. In addition to the positive news about wages, increased business confidence and investment is starting to rebalance the economy.
Also, there is more good news for the economy as there is a resurgence in exports. EY suggests that they remain buoyant despite the strong pound, and exports should strengthen further as world trade accelerates, growing at 5 percent and higher through to 2017. While exports recovered well in the second half of 2013, this improvement was offset by a decrease in overseas investment income.
EY ITEM Club chief economic adviser Peter Spencer suggested that the UK recovery is likely to be achieved without the issues linked to excess credit. He says, “Though the return to positive real wage growth is undoubtedly good news, it is unlikely that we will go back to where we were prior to the financial crisis. The pickup in earnings will be slow and steady, while austerity remains on our shoulder with the 1 per cent cap on growth in most working-age benefits and more welfare cuts to come in 2015. These pressures are unlikely to reduce consumer spending increasing however, while consumer spending growth will be healthy compared to recent years, it will remain short of the 3.6 per cent annual rates seen in the decade prior to the 2008 crisis.”
Leading economists in the UK have identified that the reduction in the country’s inflation rate would be welcomed by the Bank of England, who have been under intense pressure to raise interest rates prematurely in order to check the rapidly booming property market and prevent people from acquiring any more affordable debt that could be complex when rates do eventually rise in the future.
“Clearly below-target inflation facilitates the Bank of England keeping interest rates low at 0.5% where we believe they are highly likely to stay through 2014 and during the early months of 2015 despite the economy’s improved growth and markedly reduced unemployment,” said Howard Archer, economist at IHS Global Insight.
Recently, the Office for National Statistics (ONS) revealed that house price inflation soared to its highest point in nearly four years, with statistics indicating that house prices increased by 9.1% in the year to February, which is a marked rise from the 6.8% figure displayed the month before. More surprisingly, the equivocal figures on the movement in property prices in London indicated that they had risen by a monumental 17.7 percent in the year to February 2014, suggesting that a housing bubble could occur in the capital sometime in the near future.
While the primary engine of the recovery has been consumers switching from saving to spending, there are several indications that the upturn is now moving to a sounder and more balanced footing. The tightening labour market and falling inflation will boost real wages as well as employment, helping to sustain consumer spending.
However, business investment is now also kicking in, supported by high levels of corporate cash and confidence. More tentatively, exports are strengthening as the UK’s major overseas markets recover. Together, these factors hold out the prospect of a long period of sustained, low-inflation expansion. Lastly, the cost of living for many people should also be improved in the future.
What do you think the government should introduce to try and help many people having issues with high costs of living, for instance increase minimum wage?