Stresses Intensifying On Economic Lynch Pin #2

While UK wages have started to respond to the higher cost of living, the magnitude of second-round effects has been limited thus far.

• In the first chart below we have deflated average weekly wages by the UK CPI and transformed to a Y/Y series. Real wage growth has collapsed and is returning to 2009 levels.
• Continued job gains are eroding space capacity, although the growing population of inactive workers (outside of the labour force) has been the main factor behind the tightening labor market. Indeed, while the economically active population has increased by 0.76% since December 2019, employment has contributed -0.27pp (total employment is still below pre-pandemic levels) while the stock of workers outside of the labour force has contributed 1.03pp.
• Even with the labour market still tightening, concerns about the economic outlook are being well-telegraphed (not least by the BoE's own particularly gloomy assessment at the August MPC meeting) and could work against wage negotiations when job security starts to trump maintaining purchasing power.
• A persistent squeeze on real incomes, heading into another surge in household energy bills, would require spending down savings or liquidating assets in order to maintain consumption, otherwise household spending would need to adjust lower.