UK cost of living crisis set to ease for first time in two years: Report

By Andrew Atkinson

Relief is in sight for hard-pressed British households, with figures next week expected to show that wages are on the verge of growing faster than prices for the first time in almost two years. 
 

Average earnings excluding bonuses rose 7.3% in the year through June, only slightly less than the 7.9% rate of consumer-price inflation, Bloomberg Economics predicts ahead of official labor market data due to be published on Aug. 15.

Data a day later are forecast by the Bank of England to show a further fall in inflation to 6.8% in July after the energy regulator cut the maximum amount households pay for gas and electricity. That sets the scene for wage growth to outpace inflation for the first time since September 2021 as scarce workers continue to bid up salaries.

 

That moment will be celebrated by Rishi Sunak’s Conservative government, which needs some good economic news after months of rising mortgage rates and crippling public-sector strikes. The prime minister has staked his reputation on restoring lost spending power as he tries to overcome the Labour opposition’s formidable lead in opinion polls.

With energy prices set to fall further in October, inflation is now on course to end the year at 4.9%, forecasts show. That will allow Sunak to deliver his pledge to cut inflation in half this year.

With a general election expected to be held late next year, Sunak has little time to turn things around. The worst bout of inflation in decades has seen real wages drop by around 4% over the past two years. 

While economists now expect a steady recovery, living standards may be no higher in 2026 than they were in early 2022 — before Russia’s invasion of Ukraine sent energy prices skyrocketing. 

The risk that the recovery could be derailed was underlined on Wednesday, when European natural gas futures jumped as much as 40% amid renewed jitters over potential supply disruptions.

For many, any benefits from the return of real wage growth are likely to swallowed up by more expensive home loans and rents. It could nonetheless make life more difficult for the BOE, which has delivered 14 consecutive rate increases in its battle to get inflation back to the 2% target.

What Bloomberg Economics Says...

“If nominal pay growth overtakes inflation in the second half of the year, as we expect, it’ll be important to remember the context – real wages are still well below the levels that prevailed prior to the recent surge in prices. From the Bank of England’s perspective, the hope will be that greater spending power doesn’t come hand-in-hand with a big pick-up in consumer spending. If it does, any hopes that the hiking cycle is nearly over would be dashed.”

—Dan Hanson, senior UK economist

Kicking off the major data cycle for August, the Office for National Statistics will tomorrow publish its preliminary estimate of gross domestic product for the second quarter.

According to Hanson and Ana Andrade of Bloomberg Economics, the signs point to stagnation rather than the 0.1% forecast by the BOE last week. June alone is expected to register modest growth after May was hit by an extra public holiday for the coronation King Charles III.

UK PREVIEW: GDP to Show Economy Hit by Year-Long Stagnation

The medium-term forecasts make the task of improving living standards difficult for Sunak, as higher interest rates and weak productivity growth act as drag on the economy.

 

The BOE expects the economy to fully recover its pre-pandemic size in the third quarter — among the last major industrialized economies to do so — and then stagnate. Bloomberg Economics is more pessimistic, predicting a yearlong albeit mild recession starting at the end of 2023 that will keep GDP below 2019 levels until 2026.