Looking back, the spring of 2015 was the perfect time for David Cameron to fight a general election. Tumbling oil prices had left inflation at zero and after a couple of years of falling unemployment, annual wage growth was nudging 3%. Rising real earnings translated into a feel-good factor that delivered a political dividend for the Conservatives.
Two years on, the real surprise is not the bounce-back in inflation, which at 2.3% remains modest by Britain’s recent standards, but the renewed slowdown in wage growth. Unemployment has continued to fall since the general election and the jobless rate has not been lower since the 1970s.
A tightening labour market is normally associated with upward pressure on earnings, but wage pressure actually seems to be abating. Earnings growth is running at half the 4% expected by the Bank of England a couple of years back.
All this takes some explaining. To say the least, it is unusual for an economy to be nearing full employment with absolutely no upward pressure on wages. There are record job vacancies and reports of skill shortages, both of which would normally increase the bargaining power of employees.
There are a number of possible explanations. One is that the economy is still quite a way from full employment. The labour market expert John Philpott believes the jobless rate could fall to 4% before wage pressure starts to build.
Another is that there is a difference in wage growth between those workers who move jobs and those who remain with the same employee. The movers are able to negotiate better pay deals than the stayers. A third is that the 1% pay limit for the public sector – which accounts for about one in six employees – is dragging down overall earnings growth.
Whatever the explanation, the squeeze on real wages will continue and intensify. Inflation is going to hit 3% later this year and will comfortably outpace earnings growth.
For consumers, this will be a rerun of the first half of the last parliament, although the impact is unlikely to be as severe, since back then a combination of rocketing oil prices and higher VAT took the annual inflation rate to 5% at a time when wage growth was struggling to get above 1%.
In the circumstances, it is not hard to see why George Osborne was booed by the crowd when he turned up at the 2012 London Paralympics, because there tends to be a correlation between what’s happening to living standards and the popularity of the government.
The current period of falling real wages could hardly have come at a worse time for Theresa May, since it coincides with the start of two years of hard bargaining to thrash out Britain’s departure from the EU. Those negotiations will take place against a backdrop of people feeling poorer.
Tesco’s troubles are not over yet
Not that you’d know it from the performance of its shares, but Tesco seems to have got its mojo back. Britain’s biggest supermarket chain has announced its first sales growth in seven years. Profits have again broken through the £1bn barrier and exceeded City expectations. The dark days when the company recorded an annual loss of more than £6bn – one of the biggest in UK corporate history – are now fast receding. Yet the near 6% drop in Tesco’s share price made it the biggest loser in the FTSE 100.
In truth, the market reaction is not a criticism of the impressive job that Dave Lewis, chief executive, has done in turning round Tesco’s fortunes since his arrival in 2014. The strategy of getting the basics right has worked.
Rather, the share price reflects concern that this might be as good as it gets, at least for a while. One source of anxiety is the proposed takeover of the cash-and-carry company Booker, which some of Tesco’s investors are clearly unhappy about.
Perhaps more significantly, supermarkets are operating in a highly competitive market that will be made even more challenging by rising inflation. In the energy sector, the lack of competition means EDF can announce it is increasing energy bills for 1.5 million customers by 8.5% – the second price hike this year. Any supermarket that tried to do the same would be committing commercial suicide.
So, investors anticipate that Tesco will be forced to shield its customers from the higher cost of imported food caused by the fall in sterling, while at the same time chiselling out efficiency improvements. That’s not going to be easy.
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