Inflation flatlines despite strong UK wage growth

17 April 2019

The UK economy continues to undershoot its inflation target despite record low unemployment.

Consumer Price Index (CPI) inflation remained at 1.9%, the third month it had been below it’s the Bank of England’s 2% target rates according to the latest figures from the Office of National Statistics (ONS).

The Consumer Prices Index including owner occupiers’ housing costs (CPIH) 12-month rate was 1.8% in March 2019, unchanged from February 2019.

The continued low rate of inflation goes against conventional economic theory. The present strength of the UK labour market, theory says, should be feeding into higher inflation.

Steven Cameron, pensions director at Aegon, comments: “Yesterday’s wage growth figure shows the UK’s labour market is in a strong position with total pay increasing by 1.5% above inflation for the three months to February.”

That should, in theory, start to translate into firms raising prices, causing inflation.

Some still think this to eventually feed through.

Tom Wells, manager of Smith & Williamson Global Inflation-Linked Bond Fund says: "We expect UK inflation to remain resilient over the coming months. One reason is that rising labour costs should start to feed through to inflation.

"Another is that the cap on utility prices is being increased and this will affect April’s inflation print. Oil prices have also rallied over the last three months but clearly this is a volatile component of inflation.”

Low unemployment and rising wages failing to feed into inflation is a concern across advanced economies. In the US, the Federal Reserve has launched a review of its framework of understating inflation.

Recent research has blamed persistent low inflation on structural economic factors, including the ability of companies like Amazon to keep prices low as well as the increased reliance on imports from emerging markets.   

Pantheon Macroeconomics is expecting a pick-up in inflation in April. The economics consultancy argues: “Looking ahead, CPI likely will jump to about 2.3% in April, partly because the data probably will be collected in the week just before Easter, whereas they were collected two weeks after Easter in April 2018.

“In addition, Ofgem's decision to raise its energy price cap by 10% on 1 April likely will boost the headline rate of CPI inflation.”

The Retail Price Index (RPI) inflation (which includes the costs of houses) came in at 2.4%. That, however, was also lower than expected. House prices in London and the South East in particular have struggled.

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