Government urged to act on wage squeeze as UK inflation rate hits 2.9% – as it happened

Graeme Wearden

from Economics | The Guardian on 2017-06-13 15:08 (#2SS6T)

Britain's cost of living is rising at the fastest pace in four-year high, intensifying the squeeze on households

4.08pm BST

That's all for today, I think.

Here's our latest news story on the inflation data:

4.05pm BST

Our economics editor, Larry Elliott, argues that the government must respond to the pickup in inflation, and reverse some of its austerity measures.

He writes:

Had Theresa May won the landslide she was clearly expecting, the government would have been able to ride out this difficult period. Inflation is likely to go up a bit further, but the ONS's separate figures for producer output prices, which measure the cost of goods leaving factory gates and provide a guide to inflationary pressure early in the pipeline, appear to have peaked. Moreover, weaker consumer spending will result in lower growth and this will eventually feed through into a fall in inflation.

But May is a weakened prime minister heading a minority administration and she doesn't have time on her side. The government has recognised that voters are unhappy about falling living standards and have had enough of cuts. Deficit reduction will now play second fiddle to the need to raise real incomes, so expect a generous uplift in the minimum wage and an easing of curbs on public sector pay as signs that the age of austerity is over.

3.43pm BST

Rising prices are bad news for those who have managed to save money, particularly if they're relying on savings income (as many pensioners are).

M&S have calculated that the gap between the interest rate on cash savings and inflation is the widest since November 2011.

"At this rate, 5,000 left in an average bank account would lose 137.50, in real terms after the effects of inflation, over the next 12 months.

"All investments come with some risk, but these rock bottom net savings rates carry the very real risk of eroding wealth."

3.17pm BST

The head of the Confederation of British Industry has called Thursday's general election a political earthquake, but said it's an opportunity for a different kind of Brexit in which the voice of common sense is heard.

"My biggest message is this is a time to broaden the church, listen to and work through the biggest issues.

"We know we really care about the strength of our economy, about the regions of the UK growing. Don't just be focused on London. The young turned out in their thousands, listen to that young voice."

"We know we want access to the single market, jobs depend on it. We also know there is a dilemma we're facing, there is real public concern around immigration. We're also seeing companies with skills shortages, a 96% reduction in nurses applying [as revealed yesterday].

We need to open up that dilemma again and come up with ways to address the public concern."

"I think nobody in this room would think the referendum campaigns were good. The information and understanding... I think we can get to a better place now, where there are more voices coming through. Universities, young people. The chips are falling a different way now and we can have a different outcome. The fact is the EU will be our trading partner for a long time and it's an opportunity to protect our relationship."

3.01pm BST

While Britain faces the prospect of falling real wages, squeezed households and ongoing child poverty, America's stock market has just hit a new all-time high.

BREAKING: Dow Jones Industrial Average hits new all-time high. https://t.co/0z9FK8VnYl pic.twitter.com/cjopE1e756

2.42pm BST

UK government bond prices have hit their lowest levels in a month since the inflation data was released.

The pound has also risen, now up 0.7 of a cent at $1.2720.

FTSE is up 0.01% at 7,512.93. LSE +6%. Convatec +2%. Johnson Matthey, Tesco, Fresnillo, Anglo American & Mediclinic +1%. 3i -2%.#UKshares

2.04pm BST

Ashwin Kumar, Chief Economist at the Joseph Rowntree Foundation, has joined the ranks of the experts calling for the government to end its benefits freeze.

He points out that the policy becomes particularly harsh when prices start to accelerate:

"People on low incomes face challenging times. Inflation is up by the highest rate in five years, continuing a sharp rise since the Brexit vote, and employment figures out tomorrow are likely to show that wages are barely keeping up. With increases of 2 per cent in food, nearly 5 per cent in energy and 3 percent in clothing and footwear, families are facing very difficult choices.

"The benefit freeze will squeeze family budgets even further. This was a policy designed in an era of very low inflation. This is no longer the case and low-income households are suffering. As the cost of essentials rises, the new Government could help struggling families by ending the freeze on benefits."

2.03pm BST

Given the current economic uncertainty, Brits should plan for this wage squeeze to last for some time.

Calum Bennie, savings expert at Scottish Friendly, says.

"The seemingly perpetual squeeze on UK households continues. The rise of inflation to 2.9% means no end is in sight for hard-pressed consumers who see prices rising but growth in their wages failing to keep pace. It is no surprise then that consumers are reining back on spending or in many cases are turning to credit to get by as day-to-day living gets more expensive."

"Prices will continue to rise due to the falling pound and the higher costs of imports so the message has to be try to be prudent with spending and stash more cash. You will need more bang for your buck in the next few months and having more money in your financial armoury can only help."

1.11pm BST

Britain's real pay crisis is a sign that austerity has failed, argues the GMB Union.

Tim Roache, GMB general secretary, says Theresa May must take the opportunity to ditch polities such as the public sector pay freeze:

"Yet again, we are seeing the cost of living rise faster than wages. Inflation has risen to almost ten times its rate 12 months ago.

In the real world, that increase means that no matter how hard people work, increasingly they are struggling to pay their bills.

12.41pm BST

A neat summary of today's data:

Spot the problem. pic.twitter.com/3IxmppSnqW

12.29pm BST

House price inflation has also risen, thanks to a pick-up in prices in London.

The average house price rose by 5.6% in the 12 months to April, to 220,000. That's up from 4.5% in the year to March 2017.

While up against March 2017, there has been a general slowdown in the annual growth rate since mid-2016.

#UK #house prices 5.6% in Apr & 1.6% vs Mar, average price now 220k, deceleration likely to continue https://t.co/iQdKI5JfCj pic.twitter.com/miAb0jUJg2

11.53am BST

Today's Evening Standard is splashing on the rise in inflation, and blaming it on the EU referendum.

Our first edition @EveningStandard has today's 2.9% rise in inflation caused by Brexit devaluation + @tombradby on May & latest on Lions pic.twitter.com/d9P9mypK7W

There was growing concern in the City today that the hit to consumer spending power combined with political uncertainty following the loss of Theresa May's Commons majority will further undermine already slowing economic growth.

11.32am BST

There's a danger that the political deadlock in Westminster could push inflation higher in the months ahead, warns Stephen Clarke, economic analyst at the Resolution Foundation.

And that could be particularly bad news for poorer families, if essential purchases like food and clothes keep climbing while benefits remain capped.

"The latest rise in inflation adds further pressure to already shrinking pay packets. The uncertain political environment, coupled with Brexit negotiations beginning in six days' time, is already having an impact on sterling and could create further inflationary pressures down the track.

"The latest rise in inflation will be a double blow to low-income working families, who are also seeing their tax credits fall in value as they have been frozen in cash terms. Many will wonder whether the 'end of austerity' announced by the Prime Minister last night could mean a softening of the ongoing benefits freeze.

The pay squeeze is set to worsen as inflation rises and wage growth remains around 2 per cent pic.twitter.com/deaI4139pv

Housing, clothing, food and drink responsible for rising inflation in recent months - likely to hit the least well off the most pic.twitter.com/wqq21xRrqr

11.22am BST

Ben Lord, who manages M&G's UK Inflation Linked Corporate Bond Fund, predicts that CPI inflation will peak at 3% later this year.

He also believes the Bank of England will resist any pressure to raise interest rates in response:

At this point, with such high uncertainty about the direction of travel into Brexit negotiations, but with very significant downside risks, it seems extremely unlikely the Bank of England will tighten policy at this point.

With so little evidence of domestic inflation pressures, and with most inflation coming from 'transient' and exogenous forces, governor Mark Carney will look through CPI at 3%, 4% even 5% perhaps.

11.06am BST

Britain's inflation rate has been driven higher by the slump in the pounce since June's referendum, tweets Conservative MP George Freeman:

This is the reality of the devaluation of the post Brexit: rising cost of living & falling earnings = less money in people's pockets. https://t.co/nSQxD6VUvm

10.49am BST

Hannah Maundrell, editor in chief of money.co.uk, has sent over some advice on coping with inflation:

10.38am BST

The Child Poverty Action Group is urging the government to help struggling families cope with the ravages of inflation.

Chief executive Alison Garnham says:

"Unless there's an urgent re-think of the current freeze on benefits, the living standards of ordinary families will slip and slide downwards with serious consequences, particularly for children. Families are saying they can't manage. They need some leeway. Now is the time to ensure that benefits for working and non-working families once again reflect their needs and so rise with inflation.

"The failure to uprate benefits in line with inflation is the single biggest driver behind child poverty rising to 4 million and why it's set to rise to over 5 million by the end of the new parliament."

10.32am BST

This chart from Sky News's Ed Conway shows how Britain is now experiencing its second real wage squeeze since the financial crisis:

Wages (red) vs inflation (blue). Already the biggest real wage squeeze in two centuries. Now intensifying again. Britons are getting poorer" pic.twitter.com/UdJSuAR6jY

UK inflation hits 2.9% in May. Higher than wage growth (2.1%), consensus fcast (2.7%), & BoE fcast for peak inflation (2.8% in Q4 07)

10.23am BST

Maike Currie, investment director for personal investing at Fidelity International, says inflation has hit "eye-watering" levels.

"Rising prices coupled with lacklustre earnings growth means our wages aren't keeping up with the rising cost living. Our real income are being squeezed and we're witnessing this impacting UK consumer spending, which fell for the first time in nearly four years in May as consumers tightened their belts. This is bad news for an economy which relies on confident consumers spending on goods and services - already we are seeing signs of a stagnating economy as confidence among companies and consumers falter. Election result paralysis will only add to the UK economy's woes.

"Inflation never seems like a problem until suddenly it is and while it may be good news for borrowers, as it erodes the value of their debts, it has detrimental implications for savers, investors and retirees, chipping away at the value of future interest and dividend payments and eroding the worth of your capital pot. Once pricing pressures become entrenched, consumers' feel the pain, businesses don't invest and the stock market gets worried.

10.17am BST

TUC General Secretary Frances O'Grady says the government must respond to the wage squeeze by ending the 1% cap on public sector pay rises:

"The election showed that working people are struggling. And the biggest price rises in four years won't provide any comfort.

"Working people are still 20 a week off worse, on average, than they were before the crash - and now rising prices are hammering their pay packets again.

UK #inflation rises unexpectedly in May to 2.9%, highest since June 2013 pic.twitter.com/9iz81wPU0J

10.11am BST

Guardian Business has launched a daily email.

Besides the key news headlines that you'd expect, there's an at-a-glance agenda of the day's main events, insightful opinion pieces and a quality feature to sink your teeth into each day.

10.10am BST

Britains' household finance squeeze has intensified, warns Ben Brettell, senior economist at financial services group Hargreaves Lansdown:

Today's numbers from the ONS showed inflation jumped to a fresh four-year high of 2.9%, as a fall in the price of motor fuels failed to offset higher prices for energy, food and recreational goods. Lower air fares also had a downward effect as the Easter holiday drops out of the calculation. Economists had expected the rate to remain at 2.7%.

Wage data out tomorrow is expected to confirm pay is shrinking in real terms, and a report out yesterday from Visa confirms consumers are under pressure, with spending falling 0.8% year-on-year in May.

10.04am BST

Here's our news story on today's inflation report:

UK inflation jumped to a four-year high of 2.9% in May, signalling a sustained fall in living standards as prices rose faster than wages.

The consumer prices index went up from 2.7% in April and has been steadily increasing since the Brexit vote a year ago, which triggered a sharp drop in the value of the pound and pushed up the cost of goods imported from abroad. Inflation was 0.3% in May 2016, a month before the EU referendum.

10.03am BST

A Treasury spokesperson has responded to the jump in inflation, saying:

'The government is helping families with the everyday cost of living by keeping taxes low, freezing fuel duty and increasing the National Living Wage.

A typical basic rate taxpayer now pays 1,000 less income tax than in 2010 and increases in the National Living Wage mean 1,400 extra a year for a worker since its introduction.'

9.53am BST

Here's more detail from the Office for National Statistics about why inflation jumped to 2.9% last month:

9.52am BST

There's more inflation coming down the pipeline, warns Duncan Weldon of Resolution Group:

Headline UK CPI at 2.9%, core at 2.6%. Both ahead of consensus.

Lower oil & stronger sterling have put a lid on input price inflation - although still running at 11.6%. More pass through to CPI to come. pic.twitter.com/fmvuj9ezhY

9.52am BST

Inflation is now rising faster than the Bank of England expected, points out Ben Chu of the Independent.

In its May inflation report the Bank of England projected CPI inflation to peak at 2.82% in Q4 2017. We're already above that: pic.twitter.com/3RP1JdicyG

9.46am BST

This chart, from Reuters' Jamie McGeever, shows the impact of higher inflation on pay packets:

UK inflation rises to 2.9%, a 4-year high.
This tightens the squeeze on real earnings, which are now falling at the fastest pace in 3 years. pic.twitter.com/Hi4Eii7eLq

9.44am BST

The rise in inflation means that the cost of living squeeze has worsened.

Earnings figures due tomorrow are expected to show that basic pay only rose by 2.0% in the last quarter, meaning they won't have kept pace with inflation.

9.39am BST

This charts hows how the Consumer Price Index has jumped to its highest level since June 2013 (the yellow line).

9.33am BST

9.30am BST

Breaking! Britain's inflation rate has jumped to 2.9% in May - a new four-year high.

More to follow....

9.24am BST

The pound has now crept back over $1.27, a gain of half a cent today.

Nice to see the UK Pound nudge its way above US $1.27 this morning #GBP #BoE

9.20am BST

Economist Rupert Seggins has tweeted some handy charts on inflation, ahead of May's consumer prices index report (due in around 10 minutes).

This shows how inflation has risen sharply in recent months:

(1/4) UK inflation expected to come in at 2.7%y/y for May, on both the CPI and the CPIH measures. New figures out at 9:30. pic.twitter.com/s3SyzUTX3I

(2/4) Sterling has been constantly in the headlines, but the real push into price inflation is still some months away. pic.twitter.com/wahQY9lesu

(3/4) World food price inflation continues to cool, but it takes a couple of months for that to feed through into UK inflation. pic.twitter.com/smH12bdFWy

(4/4) Oil price inflation has cooled of pretty rapidly and that should help cool overall UK consumer price rises a bit. pic.twitter.com/YavlO8QIOs

9.00am BST

Merlin Entertainment, which runs many of Britain's largest theme parks and tourists attractions, has warned that demand has fallen since the terror attacks in London and Manchester.

Shares in Merlin have fallen by 3%, to the bottom of the FTSE 100 leaderboard, after it told that City that fewer domestic tourists have been making day trips to its sites - whihc include Alton Towers, the Sea Life centres, and Legoland.

"The impact of recent terror attacks on our London attractions is unclear at this stage."

"What is clear, however, is that London has bounced back before and will do again. I have every confidence in the longer term resilience and growth trajectory of the market. London is very much open for business, welcoming visitors from the UK and from around the world to this exciting and vibrant city."

8.44am BST

European stock markets have risen in early trading, with the FTSE 100 gaining around 0.25%.

The pound has woken in a better mood than it did yesterday, lifting 0.2% against the dollar and 0.3% against the euro. The FTSE also looked a bit chirpier, rising 0.3% to sit at 7530.

art of that positivity will stem from this morning's Reuters poll stating that the risk of a 'hard' Brexit has fallen following Theresa May's failure to secure a Tory majority; that's not the same as the PM now chasing a 'soft' exit from the EU, but it's still good news for sterling.

8.42am BST

Cabinet minister Michael Gove, who campaigned to leave the EU last year, has dropped a hint that Britain is inching away from a hard Brexit.

Michael Gove says the government should "proceed with the maximum possible consensus" and take account of Remain voters' concerns #r4today

8.18am BST

City traders should also take note that Michel Barnier, the EU's chief Brexit negotiator, is running out of patience.

"Next week, it will be three months after the sending of the Article 50 letter.

"We haven't negotiated, we haven't progressed. Thus we must begin this negotiation. We are ready as soon as the UK itself is ready."

As Barnier's impatience grows, saying no time to waste in Brexit talks, it's clear UK needs time & clear thinking. https://t.co/KLHMbFf3Si pic.twitter.com/ShdMoJRgRu

"Lots of people underestimated #Brexit consequences" Michel Barnier withering in @ft interview and urges UK hurry up.

Barnier sees no point in extending Brexit talks in March 2019: 'every delay is instability we don't need'.

8.10am BST

Analysts at Royal Bank of Canada agree that last week's election shock has changed the Brexit landscape.

But they're not sure, though, that Britain can maintain in the Single Market:

Calls for a so-called 'soft' Brexit need to be weighed against the reality that both Labour and the Conservatives had manifesto commitments to take the UK out of the Single Market.

In any case, it looks as though the existence of a minority government with less authority in the House of Commons is set to fuel expectations that the UK's Brexit strategy could be modified in some way.

Senior insiders say one of the ideas actively being considered to win backing across parliament was "not to major" on the controversial "no deal is better than a bad deal" position taken by May before the election.

Also under consideration is whether to exclude overseas students from the immigration numbers and even possibly to abandon the target to reduce immigration to the "tens of thousands". Although nothing has been agreed, any softening of the position on immigration could maximise the chance of a closer economic relationship with the EU.

7.54am BST

As the dust settles from last week's general election, economists are coming to the conclusion that Britain is less likely to exit the EU with a 'hard Brexit'.

That's according to a new poll of City experts from Reuters, who say:

The chances of Britain ending up outside the single market when Brexit talks are concluded have receded somewhat after last week's election, although the pound might weaken further against other currencies, a Reuters poll of economists found.

Around two-thirds of the economists polled this week, 33 out of 49, said the chance of a hard Brexit had receded somewhat.

7.43am BST

Good morning, and welcome to our rolling coverage of the financial markets, the world economy, the eurozone and business.

We're about to find out how much damage the weak pound did to UK household budgets.

We get to look under the bonnet of the UK economy this week, at a time when there is rising evidence that the UK consumer having enjoyed a post Brexit shopping spree is now scaling back as inflation starts to eat away at average earnings.

Having started this year at 1.8% CPI inflation hit 2.7% in April and looks set to stay at this level in the latest May numbers which are due out later this morning. Core prices have also jumped sharply since the beginning of the year from 1.6% to 2.4% in April, though we are expected to see a slight moderation in the May numbers to 2.3%.

The City is bracing itself for the European Commission's proposed changes to the European Market Infrastructure Regulation (Emir), due out on Tuesday morning.

Brussels sources told City A.M. the proposals will include a mechanism giving the EU power to force relocation of euro clearing activity, which is currently dominated by London.

Today's @cityam front page, by @wturvill: City braced for EU clearing raid https://t.co/gkccp0Cxkj pic.twitter.com/bMa1DK6R4R

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