Households will Feel the Pinch, as Inflation Rises
NIESR has warned that wages will shrink as inflation increases this year. “What we see over the next couple of years is the failure of wages to keep pace with consumer-price inflation, feeding through into the pinch on households,” Simon Kirby, head of macroeconomic modelling and forecasting at NIESR, told reporters.
In a report published on Wednesday, the National Institute of Economic and Social Research (NIESR), said that consumer price inflation will peak at 3.4% at the end of this year, while wages would only rise by 2.7%. While wage growth will rise during the rest of the year, NIESR said that it will remain below inflation, which means that average workers won’t see an increase in real terms.
Inflation: Inflation refers to an increase in the overall price level. If inflation rises 3% then that means that goods would be 3% more expensive, unless the wages also grow with inflation.
Consumer Price Index (CPI): The CPI represents prices that consumers pay for a basket of goods every month, so that data gathered monthly can be compared to see whether prices have increased or not. The CPI is used to measure the inflation rate.
“In real terms” refers to changes in financial numbers after the effect of inflation has been priced in. The phrase “adjusted for inflation” also means the same. For example, “in real terms” is used when such measures as economic growth, savings or wages change after inflation. “Nominal terms” refers to the same measures but without adjusting them to changes after inflation. If a worker’s wage increased by 3% and inflation also rose by a 3%, then that would mean that the worker’s wages have remained the same, in real terms.
NIESR’s Simon Kirby said: “GDP growth over the next couple of years will be subdued, growing at less than the economy’s long-run potential rate of 2% per annum, but households will feel the pinch from rising consumer price inflation.” He also added: “The rate of inflation is expected to rise from 2.3% per annum in March to almost 3.5% by the end of 2017. By 2018 we expect consumer spending growth to have effectively stalled.”
Did Brexit affect economic growth?
NIESR said that disposable incomes will be squeezed, but the GDP growth—how fast the economy is growing—would rise from 1.7% this year to 1.9% in 2018. NIESR explained that triggering article 50 had a minimal impact on financial markets and the economy is slowly, but surely moving ahead. However, there might be risks if the UK leaves the EU without a deal, which, combined with Trump’s protectionist policies, might threaten the global economy.
In terms of the labour market, this remained strong with unemployment rate of 4.7% and employment rate rising up to 74.6% in the three months to February. Kirby said: “Despite the strong performance of the labour market, real wages growth remains subdued, perhaps indicating some slack remains.”
The Bank of England (BoE) officials are expected to keep interest rates at 0.25% on Thursday so that they continue to support the economy and the job market.
Brexit: Bad News for Leave campaign supporter
While the UK economy appears to be resilient, some of the Brexiteer architects seemed to have wished for the economy to collapse.
On the one hand, households are seeing their spending power decrease, but, on the other hand, others seem to have too much spending power that they have used to change the political and economic landscape, with the intension to profit from it. But, unfortunately, things didn’t work out the way they wanted. Instead, fortunately, for the rest of us the UK economy remains robust.
According to the Independent, Crispin Odey, a supporter of the Leave campaign, who donated more than £870,000 to pro-Brexit groups, has also bet huge amounts of money “on the UK economy tanking in the aftermath of a Leave vote. So far, it has held up better than expected.” The Sunday Times estimated that he lost £125m, but he still has around £775m in the bank.
Odey predicted that due to increasing inflation and a recession, UK stocks would lose 80% of their value. While he might have been wrong, he did make £220m the day after Brexit when the pound had temporarily crashed.
Brexit hasn’t destroyed the economy, but it won’t leave it unscathed either. The economy will slow down and people will continue to struggle, especially if they live on average salaries. But what comes as shocking news, is the way certain Leavers were ready to pour money down the drain, speculating at the expense of those who really believed in Brexit.