Squeeze on incomes eases
Jul 20, 2012
There was some good news on inflation for a change this week. The annual rate of consumer price inflation (CPI) fell to a 30-month low of 2.4% in June from 2.8% in May. This was due to lower transport costs and high-street discounts. Inflation has now fallen for two months in a row, for the first time in three years. Still, it has been below the 2% target for just 12 months out of the past seven years.
The labour market picture, meanwhile, remains mixed. The main gauge of unemployment declined in the three months to May but the more timely claimant count ticked up in June. The government said it will underwrite up to £40bn of private infrastructure investment in a bid to help growth.
What the commentators said
Any boost to growth from the government’s infrastructure loan guarantees will take a long time to feed through, noted The Wall Street Journal. And counting on another dose of quantitative easing, or money printing, to spur growth is pointless. The “excessive faith in the salvation of monetary policy” is hard to understand. After all, “if central bankers could stimulate a boom, the easing would already have done so”.
Yet the fall in inflation brings hope. With government spending being reined in and exports dented by the euro crisis, only consumption can give the economy some pep. In this context, “the only thing that can help is a fall in inflation”, said Hamish McRae in The Independent. UK consumers, who account for around 60% of the economy, “have had to endure two years of misery”, says Fxpro.com.
With inflation high and pay growth subdued, real incomes were cut by 7.5% over the past two years, according to the Ernst & Young Item Club. But the squeeze is abating. Further falls in inflation are on the cards as large energy price rises fall out of the annual comparison, while global commodity prices have eased.
“Wages should be able to keep pace with prices over the second half of this year and pull ahead next year,” reckons Andrew Goodwin of the Ernst & Young Item Club. The “significant” consequent boost to household incomes should “kick-start the consumer recovery”. Higher demand among consumers could bolster confidence among producers, whose greater spending would then foster jobs and more consumption in a virtuous circle, as Hamish McRae pointed out.
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