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Free AccessPill: Expect To See Some Easing In Wage Dynamics As Headline Inflation Falls
Q: What is driving wage growth? And if headline CPI falls, to what extent can the MPC rely on this to bring wage growth down without a downturn in the labour market?
- A: Inflation persistence lasts for many months so the amount of information in each month's data is limited. The reason we look at labour market developments and wages is they give complementary and potentially different information. Short-term inflation expectations are correlated very strongly to what happens in spot inflation.
- The story here is UK terms of trade has squeezed real incomes, and workers try and resist this squeeze by trying to bid up wages in the labour market. That is one factor and expect to see some easing in wage dynamics as headline inflation falls - from both base effects and price falls (gas prices off their highs).
- The fact that energy prices remain higher on a level-basis means there is still a squeeze on household real incomes. Need to see underlying inflation momentum (for which core is an imperfect approximation) get back to 2% so that when base effects, volatility pass through the system organically.
- The only lever to ensure that's the case is through capacity in the labour and goods markets.
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Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.